Why Scotland is set for record inward commercial real estate investment
David Stewart is partner in the commercial real estate division at independent Scottish law firm Morton Fraser
In Scotland, it has been reported in The Scotsman that its commercial property market is set for a record year of inward investment, with international funds making up almost half of all purchase value in the first six months of the year. Across the UK, the property market has also proved popular to overseas investors. The reasons for the influx of what are predominantly US, Asian and, to a lesser extent, Middle Eastern investors are twofold.
Firstly, in the face of a global economic slowdown, there is a capital flight to safe-haven investments and the UK property market is still seen as a fairly stable asset class over the medium term. Secondly, the pressure put on Sterling since the 2016 EU Referendum has made UK assets significantly cheaper, and when local market variations within the UK are taken into account, quality assets in the regions outside London can be picked up at good yields, and let to strong covenants who would be expected to ride out any disruption caused by Brexit.
Recently, however, Sterling has become more tied to political news than to economic fundamentals, leading to erratic daily fluctuations which are more akin to an emerging market currency. Post-Brexit, particularly in the event of a no-deal, it is likely we will see the market seize up further. Overseas investors who are able to take a longer-term outlook, by accepting income returns in Sterling, might hold off in the expectation of picking up greater bargains as the currency shifts further in their favour.
It is fair to say that the whole of the UK has benefitted from a lot of South Korean institutional money over the last few years. The sense now, however, it is that this has recently tailed off quite sharply, with a lot of that money being channelled into France. It’s unclear exactly why, but with 10-year French government bond yields falling into negative territory (currently c.-0.2%) some long-term investors, including Asian Sovereign Wealth funds, need to reconsider their asset allocation to meet their funding obligations. Rotating assets into French commercial property might be part of that.
Earlier this year, Singapore Press Holdings (SPH) added £133.7m worth of assets to its UK student accommodation portfolio, increasing by 1,243 beds to 5,059 beds across 20 assets in 10 cities. These acquisitions indicate a focus on direct student lets, and SPH’s investment rationale is driven by net income returns. Clearly, they see carefully located student investments in the UK – assets were acquired in locations with sizeable student populations, no oversupply and a strong market for direct lets – in Southampton, Sheffield and Leeds – as a good way to meet that requirement.
This year has seen a flurry of investment activity in Scotland with Edinburgh in particular continuing to attract overseas interest, given its global tourist appeal and large student and residential population. To keep momentum going, Scotland will need stay ahead of UK alternatives, and the Scottish government’s plans to brand Scotland as a leading digital nation by embracing 5G should add to its competitiveness and continue to attract overseas investment well into the New Year.