Property investors face up to Scotland’s risk and reward

Chris Macfarlane, Director Capital Markets for JLL in Scotland

A cocktail of threats and opportunities awaits investors in Scotland’s commercial property market this year as it braces itself for renewed headwinds, according to property consultants JLL.

The warning comes after the Scottish market saw record investment in 2018 with c£2.5bn invested across all commercial property sectors – up by around 10% compared with 2017.

According to Chris Macfarlane, Director Capital Markets for JLL in Scotland, with such uncertainty around the outcome of Brexit, a new cocktail of factors is likely to see a reduction in volumes, as some buyers and sellers will adopt a “wait and see” approach.

According to his analysis, other investors will see the disruption as a buying opportunity but only if pricing is attractive and, outside of the best prime markets, values are likely to see some adjustment.

Macfarlane outlined the following areas investors should be aware of in 2019:

“Despite ongoing political and economic uncertainty surrounding Brexit last year, investors still saw Scotland as a solid investment opportunity with relative value in comparison to other UK regions. The renewed momentum we saw last summer carried through to the latter quarters, leaving us with a record total for the year which is unlikely to be surpassed this year. In 2018 there was a better flow of available stock as sellers entered to market in order to capture the momentum before the year end and the prospect of a more subdued 2019.

A strong prospect for international investors targeting the UK

“Global allocations for real estate will continue to grow with Scotland a target for funds looking at their first wave of international acquisitions. Equally due to questions over currency fluctuations, domestic investors could be at an advantage in many cases. We now have a better balance of overseas investors and UK Institutions who are more active than they have been for a number of years – both see Scotland as offering relative value when compared with other UK regions and London in particular.

Domestic opportunities amidst the uncertainty

“Currency fluctuations in the wake of a hard Brexit news will provide an opportunity for overseas investors. The pound is likely to continue to fluctuate in value as news stories around Brexit break. As the March ‘exit day’ approaches, these are likely to intensify, particularly if it looks as if no deal is more likely. These could provide opportunities for nimbler international investors to acquire stock. On the other hand, a deal is likely to lead to a boost to the currency, and renewed interest in the UK from a range of sources.

Safe bet is on longer term prospects

“The strongest part of the market continues to be long income, index linked opportunities. The demand for pension liability matching product remains insatiable, evidenced by the recent funding of Pentland House in Edinburgh – a student accommodation block let to Edinburgh University for 20 years, at an initial yield of c3.75% – a new record low for Scotland. Hotels will also continue to offer good longer term value for investors keen to find alternative options.

Alternatives still in vogue

“JLL also forecasts that there will be continued investors interest in the alternative sectors in 2019. The evolving nature of many alternatives and greater understanding of them means that investors will be prepared to look further along the risk curve in order to achieve higher returns.”