Bridging the gap

All is not gloom in the UK after the Brexit vote, with many large projects going ahead and opportunities for overseas buyers

Click here to access article as a .pdf

By Frank Simpson

In spite of the uncertainty that has affected many areas of the economy following the Brexit ref­erendum vote, there is clear evidence of continuing confidence in the UK’s appeal to investors in non-residential property.

One exemplar of this is Dutch pension fund APG’s 75:25 joint venture agreement with the Henderson Shopping UK Fund, managed by TH Real Estate, to develop the £900m-plus St James Centre scheme in Edinburgh.

“This is a landmark deal that has happened since the Brexit vote and represents a clear demonstration of confidence in high quality Scottish real estate, amid whatever concerns people might have about the underlying economy and the possibility of a second Scottish referendum on independence (indyref2),” stressed Nick Scott, head of real estate for Edinburgh-based law firm Brodies.

Nick Scott of Brodies says that there will always be buyers for quality assets in Scotland
Nick Scott of Brodies says that there will always be buyers for quality assets in Scotland

That said, Brexit is impacting on the market. “It has reduced the number of properties being marketed, and the number of people buying,” Scott said. “However, there is still a lot of interest in good assets. We have many deals on the go that started after the vote. Aside from St James, there are a number of other very large projects going ahead.

Brexit has altered who is willing to buy, and who is not. “Generally speak­ing, traditional core buyers such as pension and life funds are quietly sell­ing in Scotland,” Scott observed. But this creates openings for more oppor­tunistic buyers, most of them from overseas. “We have seen particular interest from the US and Canada, and some from South Africa, and a lot are private equity-type buyers,” Scott said.

“I would say the majority are from North America, the Middle East, and mainland Europe,” added Chris Mac­farlane, Edinburgh-based director with JLL, the global financial and pro­fessional services firm specialising in real estate services and investment management.

One example of these trends was the February 2016 sale of 100, Bothwell Street, Glasgow, for which JLL advised owners Laidlaw Estates. The 101,879ft2 office building let to the Student Loans Company was sold for £25.55m to Oval Real Estate, an investment vehicle for US private equity capital.

Some of the interest in Scotland reflects assets are in the market for the first time ever, or at least in a while. For example, Abu Dhabi Investment Authority recently put the 200,000ft2, Grade A, Saltire Court office devel­opment on sale for offers more than £69m after owning it for 23 years. Aeri­um’s £70m-plus sale to South Korea’s Hyundai Marine & Fire Insurance Co of the 158,501ft2 New Uberior House and Princes Exchange Grade-A office buildings in Edinburgh is close to completing, and the sale by M&G of Waverley Gate, Edinburgh, has been completed since the Brexit vote. M&G also sold the 89,300ft2 office in Glasgow to FORE Partnership and Kier Property for £23.25m.

Aviva is offering its 200,000ft2 Omni Leisure Centre in Edinburgh for sale at an asking price of £75m, the East Kilbride retail park for c£100m and recently sold the 600-bed Collegelands student accommodation development in Glasgow for around £37m to Brook­field. Before the Brexit vote, most large office investments in Edinburgh had been traded in the market over the pre­vious three or four years.

“It has been quite hard in the past year or so for investors to put their money into premium office space because many of the most desirable sites had been bought recently by their current owners,” Scott said. “Brexit will see some of those come on to the market again.”

Demand varies with scale, Macfar­lane added. “The market has become quite polarised. Property that is well­let to strong tenants is holding up well. We have seen no significant deteriora­tion in the market at the prime end, and there is still good demand at the smaller end when it offers good value. In between, the market is more fickle as we see UK institutions that would traditionally have played in the £3m to £10m investment size turn relatively quiet at the moment, and there is prob­ably some pressure on values.”

On pricing, Scott said: “It’s not clear­cut. While there is some anecdotal evidence that prices have fallen as a result of Brexit, there is also evidence of some deals where prices were maintained at the level they were before the vote.”

While short- and mid-term views focus on Brexit and the possibility of indyref2, longer-term drivers of the commercial property market are pos­itive for investment.

Scotland is second only to London among UK locations for attracting for­eign direct investment. Its strengths in financial and business services, technol­ogy and life sciences underpin demand for appropriate non-residential devel­opments. It has good transport and digital connectivity with London and overseas business and finance hubs, and boasts world-ranked universi­ties and research centres, an educated workforce, and a high quality of life and environment.

The Scottish Cities Alliance, an umbrella organisation under which Aberdeen, Dundee, Edinburgh, Glasgow, Inverness, Perth and Stirling collaborate with the Scottish Gov­ernment to promote the country’s economy and business growth, has outlined £7.5bn worth of investor-ready and pipeline opportunities springing from public sector investment and projects.

Highlights in the Alliance’s so-called ‘Pitch Book’, launched at MPMIM, include Aberdeen Central: a £1.5bn, 25-year city centre regeneration pro­gramme encompassing office, retail, housing and public elements; Dundee Waterfront: a £1bn, 30-year redevelop­ment of a 240 hectare site including the V&A Museum Of Design that is due to open in 2018; Edinburgh BioQuarter: a £1bn project that co-locates a medical school, hospital, research institutes and a life sciences business incubator and Clyde Gateway: a £2.7bn, 20-year regen­eration programme, Scotland’s largest.

The possibility of an indyref2 has inevitably raised questions about the impact that additional uncertainty would have on demand in the com­mercial property market.

Scott observed: “The month before the first independence referendum in September 2014 was our busiest ever, like for like. Some very large transac­tions went through right up until the vote, and we saw a lot of US private equity buyers move in.

“Some people will sell because they are concerned about what may happen, but others will buy. It is absolutely our experience that if there are quality assets to be sold in Scotland, there will always be buyers for them.”

Macfarlane added: “The market prob­ably topped out anyhow 12 months ago; Brexit has simply exacerbated that. The vote had a big impact initially with some of the big retail funds taking their money out.

“I think we have seen more rational behaviour since the summer and expect most of those big funds to be open again within the next month or so. There is uncertainty everywhere, so they could even be back buying again.”