Commercial property transactions thin on the ground, but still plenty of appetite for vanilla

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Ross Wilson, Director at DM Hall Chartered Surveyors

At a cursory glance, there is no shortage of reasons to be apprehensive about the state of the Commercial Property market in Scotland, but it has to be remembered that superficial analysis never put a shilling in anyone’s pocket, says Ross Wilson, Director and Head of East Agency at the Edinburgh commercial department of DM Hall Chartered Surveyors:

Looking under the top layer of woes regarding the constantly-changing political environment and ever greater financial tax impositions, the fact is that the reasons for solid optimism outweigh natural gloom quite handsomely.

In Edinburgh and the east of Scotland, where I have my base of operations, the market – particularly in the capital – currently is very healthy.  Transactional activity is slightly down, but that is not due to investor sentiment or a lack of funding but entirely down to shortage in stock.

The appetite for owning commercial property has rarely been more voracious. Investors simply cannot source or secure the opportunities sought.  Properties which are openly marketed that have the right attributes of financially strong tenants, long unexpired leases, passing off at a fair rental with medium term rental growth in proven locations are attracting healthy levels of interests which results in multiple offers being received at closing dates.

The supply of opportunities under the £3 million price bracket in the Capital is somewhat limited and is heavily outweighed by investment demand.  The interest in property as an asset class is there for three simple reasons:  the real returns on offer relative to other investment classes; sustained historically low interest rates with low returns being offered on bank deposits notwithstanding the comparatively cheap cost of finance and it’s a tangible asset which you can physically improve.

There is a significant pool of cash rich investors seeking to deploy their money more efficiently and to get it working all seeking the Vanilla Assets.

The lack of availability in the Capital is consequently having a positive knock-on effect in the regions.  Investors who are not able to get a bite in the city centres are being forced to look further afield to find a home for their money.

Every region is different and successful marketing still depends very largely on the fundamental criteria of the right property in the right location, priced correctly.

Investors are unique though and they all have differing attitudes to risk. Some simply want long dry secure income for 10-15 year term certain offering low risk and lower returns. Others actively seek shorter term leases which present active asset management opportunities yielding greater returns.

Against the back drop of Indyref 2 and Brexit, some might err on the side of caution, but my view is that there are unparalleled opportunities for the optimist.

The Scottish Government has also finally tried to help rather than hobble the market, certainly at the lower end, with an increase in the 100% small business bonus rates relief threshold from £10,000 to £15,000.  It has also lifted the level at which a supplement is payable from £35,000 to £51,000 whilst reducing the uniform business rate (UBR).  These welcomed enhancements reduces the cost burden on tenants which will assist and should increase letting activity in the secondary market and cannot be anything else but a fillip to the wider commercial environment.

The industrial sector, however, is still going through a slight transition following the removal of 100% empty property relief. There is the possibility that demolition will increase as an alternative to paying for a non-productive building whilst some are offering enhanced lease terms to mitigate vacant holding costs.

But in line with the theme of optimism, this may bring a healthy dose of natural selection to the industrial side with the laws of supply and demand facilitating reasonable rental growth prospects in the medium term.

The root of the matter is this: those who have weathered the storm since 2008 have almost certainly refinanced on fairly competitive terms and are not going to realise the value of their assets unless they have other more lucrative investment mediums in which to park their capital.

They are not going to sell and have their money languish in the bank – and while that scenario remains, so will the current lull in transactional activity.