By Barry McDonald
The Business Forum was chaired by Insight’s Alasdair Nimmo, who was joined by:
- Nick Scott, Partner and Head of Property, Brodies
- Chris Stewart, CEO, Chris Stewart Group
- Anne Murray, Inward Investment Manager, Invest Glasgow
- Tony Rose, Infrastructure Director, Scottish Futures Trust
- Adam Turner, Assistant Director, PwC
- Allan Watt, Dundee Waterfront Project Director, Dundee City Council
- Dr John Boyle, Director, Research and Strategy, Rettie & Co
- Elaine Ballantyne, Head of Investor support, City of Edinburgh Council
By Barry McDonald
Investment in Scotland was the topic for discussion when our distinguished panel met in the historic surroundings of the Royal Society in Edinburgh.
Identifying the decisive factors that make Scotland’s cities attractive targets for investment was central to the discussion at the recent Business Insight Forum in Edinburgh. For the panel, representing a range of senior roles in the private and public sectors there was extensive opportunity to amplify the arguments: Scotland’s coherence as a nation and financial prudence were cited as draws to the country, while its talent in developing technology coupled with innate goodwill and a high standard of living underpinned this.
The panel, however was far from complacent and quick to address questions such as depth of market, liquidity, pricing, risk and certainty – all important to investors. But while there was an imperative to remain agile in a fiercely competitive market, the existing presence of investors in our cities showed that we are “doing something right.”
What makes Scotland an attractive investment proposition for overseas investors? It’s Scotland’s reputation as a safe and stable country with a manageable scale, that makes it such an attractive investment prospect, according to Allan Watt, the man responsible for heading up the multi-million-pound development of Dundee’s Waterfront project. “We can move things quickly and have the right connections,” he said. “With a city the size of Dundee we can very quickly join things up. If we need to talk to the university, we can do so in an instant and if it’s skillsets we need, we have close links with colleges. We’re probably better joined up than we realise because we take it for granted that Scotland has a coherent proposition as a nation.”
That proposition is one that is rooted in offering a returnable value, argues Dr John Boyle of leading independent property company, Rettie and Co. Especially in comparison, he said, with London. “London is pretty expensive and the UK doesn’t have a second city as such. Edinburgh is probably as best placed as anybody to fill that position. It’s the second main financial centre in the UK and if you look at the demand drivers against the supply drivers in Scotland, we have an increasing population and that’s the first time that’s happened in 80 years. The population is over 5.3 million and a city like Edinburgh is now within touching distance of Glasgow as Scotland’s largest city.
“Entry prices in Scotland for residential and commercial are much lower than London and the yields and relatively strong and stable. In commercial property, there’s a shortage of Grade A space and student accommodation still suffers from a major shortage. Even in the hotel space, occupancy rates in Glasgow and Edinburgh are very high.”
American investors working with property developer Chris Stewart could see a strong tourism market from the hotel perspective and were encouraged to look more closely at Scotland as an investment prospect. Stewart said: “They could see fantastic occupier demand from an office perspective and amazing educational establishments.
That all gave them comfort despite Scotland being seen as regional. Edinburgh in particular was very much seen as a thriving dynamic multi-sector city. That was the basis of persuading them to invest in Scotland.”
How can Scotland’s cities be made more attractive to investors and how are the opportunities best communicated to an overseas market? There has always been strong emotional attraction to Scotland, said Elaine Ballantyne of the City of Edinburgh Council and, coupled with unrivalled talent, leads to an extremely attractive prospect. Ballantyne said: “We’ve seen a very strong growth in tech talent in Edinburgh and that has allowed us to increase venture capital into the city. The talent attracts investment. Funds around the world who look at the real estate market are now looking at the tech sector.”
“There’s already a lot of goodwill towards Scotland,” added Adam Turner, Assistant Director at PwC. “I moved here eight years ago, attracted by its good life, good jobs and good cities. It has affordable housing and a really good balance of factors that make people want to be somewhere. Scotland has, over the past few years, got the voice of some of its smaller cities out into the global marketplace at events like MIPIM.
“One of the things that comes as a constant surprise for anybody who looks at Scotland is quite how strong the proposition is and the challenge is making more people aware of that. It needs to build on the goodwill and the natural assets it has as well as developed assets like skills and property.”
While Chris Stewart encourages cities to up their game in order to maintain the interest of potential investors, the country as a whole has good occupier stability and demand due to the exemplary educational establishment and an enviable hospitality sector. He said: “What it needs to get now is that deeper end market so that there is confidence and a liquidity in the marketplace which allows upfront investment, which is the more risky capital.
“Attracting investment is one thing but investors will always ask what the exit is; they will want to know that they are in a market place for further investment.”
For Allan Watt, attracting global capital is about “making it as easy as we can for investors. We’ve looked at where we have land ownership and could enter into a joint venture with partners and reminding them that we’re also the consenting authority. It’s about giving yourself an edge to attract those investors.”
Longevity of investment is also a key driver, said Tony Rose, Infrastructure Director at the Scottish Futures Trust. “If you look at public procurements, you have Non Profit Distributing (NPD) programme and Hub program which are looking at buildings and assets mainly in the public sector, yet the vast major ity are being financed through the private sector. There are huge swathes of investors from overseas and the thing that has attracted them has been a structured approach to that public investment over a period of three to five years. They know they have a market there and can see a steady pipeline, a long-term strategy for investment.”
What factors, such as being a smart city, can act as a catalysts for international investment? Anne Murray, Inward Investment Manager at Invest Glasgow, believes being a Smart City gives you a distinct advantage in the marketplace. A Smart City, she said, “is a city that sees itself as being on the front edge and having all the appropriate infrastructures in place. It’s one of the things that Glasgow is in the process of doing at the moment. “Smart Cities are also about how you make cities more efficient and inventive. What it also does is signal to investors that it’s a city that looks to the future and understand how new infrastructure works.
It’s also about piloting new projects and sharing that experience, said Elaine Ballantyne. “People who are innovators needs somewhere to test things out.” The leadership of cities also needs to be smart, said Adam Turner. He argued: “We’re staring to see through city deals and other mechanisms the formations of growth coalitions of elected leaders, officials and private sector parties. I think that combination of perspectives helps cities make smart decisions about where they invest and focus and where they are most likely to attract investment.”
Political stability is crucial to international investment. Will the up-and-coming EU referendum inhibit international investment? Nick Scott, a Partner and Head of Property at Brodies LLP, signals a word of caution and notes that while the upcoming referendum on June 23 may have “brought the investment market to a juddering halt,” it’s likely to be a passing phase. He said: “In the lead up the Scottish independence referendum in 2014, it was one of our busiest trading periods ever because the market was kept active by US private equity. They seemed to take an agnostic view and look past the instability.
We’re in a cycle now where they seem to be repatriating a lot of the capital they’ve got. A lot of other core foreign investors who would normally take part in our market are waiting until June.”
“It’s not the final decision of the referendum that’s driving uncertainty,” added Tony Rose. “It’s the fact there is uncertainty. I was at an event recently and investors told me they were looking for four things: political stability; a strategy where enterprising growth is encouraged to flourish; cash flow predictability, and the long term pipeline which allows stability.”
There is no doubt that any form of instability isn’t welcome in real estate investment, argued Chris Stewart, as property is a long term asset and “if there’s anything in the short-to-medium term horizon that can effect value, then clearly it does affect the potential pricing or the appetite.”
“As soon as the referendum was announced the pound had a wobble on the foreign exchanges,” said Dr John Boyle. “If the opinion polls continue to show both sides on an equal footing, that wobble will extenuate even further. Investors don’t want to buy property now in countries where the currency could sharply depreciate later.”
Investment in infrastructure stimulates growth. Should large infrastructure projects be left to national and local governments? If not, how can the governments encourage private investment in infrastructure? There is no that doubt Scotland has a long history of private sector investment funding public sector infrastructure, but Adam Turner maintained the challenge is to “keep that pipeline going and keep bringing public assets to the market that private investors can invest in.”
“In Dundee we’ve recognised the way to sway that partnership is to load it in favour of the private sector,” said Allan Watt. “The model that we’re starting to see emerging applies across the nation.”
Anne Murray pointed to the constrained budgets facing Scottish local authorities and signals a move for cities to work smarter with the private sector and examine new ways of developing funding models. “The future of our city’s infrastructure will rely on it,” she said.
While the panel recognised the benefits of the private and public sector working in partnership, Nick Scott believes that there is still work to be done on persuading the public sector of the benefits. He said: “It strikes me that you’re often having to educate people about how the private sector works.”
According to EY’s annual Attractiveness Survey, Scotland punches above its weight in terms of foreign direct investment (FDI). The challenge is to build on its past achievements. How would you suggest this can be achieved? Allan Watt argued that the message for foreign investors should be a clear and simple one. However, he recognised that can be a difficult prospect given there are seven cities all vying for recognition. “We need to be clear about the proposition,” he said.
Regardless of the message, investors will always continue to invest if they see the value in Scotland, said Chris Stewart. “It’s important not to confuse the interest a tourist has in Scotland with attracting investment.
“On the one hand, the cities have done extremely well in promoting Glasgow and Edinburgh, and Dundee’s profile has shot up. But that doesn’t necessarily answer the questions an investor wants, which is around depth of market, liquidity, pricing, risk and certainty. That has to be addressed very specifically by solid government action and taking the handbrakes off the real estate industry to be seen as a mechanism for growth.”
Roll out the success stories was the message from Elaine Ballantyne. “Show examples of where investment is made and that helps create momentum.”
Adam Turner argued that Scotland must continue to remain agile in a fiercely competitive market, while Anne Murray pointed to the large global investors who are already making waves in Scotland. She said: “All the cities already have big investors. In the International Financial Services District (IFSD) in Glasgow we have JP Morgan and Morgan Stanley. They wouldn’t continue to invest and grow if we weren’t doing something right.”
It’s Scotland’s unique position as having one of the most powerful devolved governments in the world with new taxation powers, concluded Dr John Boyle, that puts Scotland at an advantage over other territories, particularly in the UK.
He said: “What we’ve seen in Scotland is tentative change to date, but, as the Scottish Government begins to learn how these new powers can be used and begin to interact more with investors, we might see more radical change which will enable us to distinguish ourselves from other parts of the UK.”