The Future of Commercial Property in Scotland

Liz Stewart, Partner, Commercial Property Team at Stronachs LLP considers the latest legal, regulatory and business challenges facing companies and individuals in an ever-evolving property landscape. She touches on the impact of the oil and gas industry and investment opportunities and the commercial property sector in Scotland.

What is the current state of the commercial property market in Scotland?

Despite the political uncertainty posed by Brexit and calls for a second Independence Referendum, the Scottish commercial property market holds firm. Against this backdrop, regional disparities are prevalent. In Aberdeen, after years of under supply, new build Grade A office accommodation far outstrips demand, giving rise to higher rent incentives and a corresponding adjustment to rates per square ft.  In contrast, Grade A office space is in short supply in both Glasgow and Edinburgh despite growing demand for good quality city centre space.

Looking ahead, some would suggest Edinburgh’s commercial property market faces something of a perfect storm for 2017 as supply of Grade A office space nears a 10-year low. City centre rents may increase and incentives are likely to be pinned back for smaller units. With limited new build Grade A stock heralded to hit the market until 2018/19, rising city centre costs may force some occupiers to look to the west of Edinburgh or other locations on the city’s periphery.

Figures for Glasgow’s office market looked buoyant for 2016 but some suggest the next few years may be more troublesome with shortages of Grade A office space threatening to cripple the market. An increase in headline rents seems likely due to the lack of stock. Refurbishments may help plug the gap until the next development cycle in 2018-2019.

A lack of speculative funding due to political uncertainty may be a problem. The challenges faced by Aberdeen and the North East, however, are more closely linked to the ongoing challenges faced by the oil and gas industry. Investment levels remained subdued for 2016. Crude prices made some recovery towards the end of the period and there are signs of optimism for the year ahead. Coupled with the recognition that Aberdeen offers good value and strong fundamentals, the city presents an attractive proposition for investors at the turn of a market. Changes and opportunities are abound with the construction of the AWPR and wide-scale development of city centre and out of town business parks, hotel developments and offices.

The City Region Deal will provide further support for the future of the North-East economy through continued, long term investment in transport, digital connectivity, life sciences, tourism, agri-food and biopharmaceuticals. The importance of diversity is recognised and addressed against a backdrop of ensuring the regions’ oil and gas industry evolves to meet the political and economic challenges posed over the next few years. All will act as catalysts in delivering development vital to the attraction of future investment and progression of the region’s economy.

Do you feel that financing and investment is more readily available now?

In a regional context and with the exception of some sectors, financing and investment is perhaps less readily available in the North East due to uncertainties surrounding the performance of the oil industry. The same cannot be said of Edinburgh and Glasgow whose markets are recovering well despite the 2008/09 recession which had less of a direct impact on the market in Aberdeen. Each region faces its own challenges, however, if investment in speculative office developments remains limited, further pressures will be applied to those markets suffering due to the limited supply of newly developed Grade A office space. Political uncertainty may continue to dampen activity although a weakened sterling may fuel demand from overseas investors.

If the oil industry takes a turn for the worse, how will this affect your clients? How will you advise them accordingly?

The recent stabilization of the oil price in the range of US $45 to $52 per barrel and the massive price rebasing in the oilfield services sector has begun to restore confidence in the sector evidenced by increases in deal activity. Where this is yet to unravel, we may see further job losses, liquidations and further pressures on the commercial property market as a whole.  Meantime, whilst the oil price remains subdued, clients may seek to diversify into related industries where the same technology and skills base can be applied. The renewables industry is one such example – both in the UK and abroad. Diversification of skills and know-how will be the key to building a sustainable future.

What are the common disputes that arise in the commercial property sector?

Disputes regarding rent reviews, requirements for landlord’s consent to assign or sub-let, exercise of break options, management of lease trigger events and liability for dilapidations at lease expiry are common. Recent case law has resulted in a shift in drafting practice/tactics for negotiation. Landlords’ ability to recover costs of outstanding repairs at lease expiry has been thrown in to sharp focus, especially where the property in question is scheduled for re-development. Rates mitigation measures are also being examined in closer detail – more so now given the up and coming rates re-valuation taking effect 1 April 2017.

What are the challenges facing owners and occupiers of business premises in the North East of Scotland at the moment?

The main challenges are undoubtedly linked to the continued downturn in the oil and gas industry and subdued oil prices. In addition, proposed increases in non-domestic rates with effect from April 2017 (with reference to 2015 rental values), compounded with the withdrawal of empty rates relief, present an economic challenge to businesses already feeling squeezed by the downturn in the local economy. Political uncertainty following Brexit, the Trump election and the spectre of a second Independent Referendum present further challenges although the effects have been less widespread so far.

How do you assist your clients with overcoming these challenges?

We place a great deal of emphasis on keeping up to date with current affairs, regulatory and legal developments, changes in the economy and proposals for investment in the region (of which there are a variety). Our close relationship with the local Chamber of Commerce and other trade bodies, not to mention, intermediaries, banks, fund providers, surveyors operating across all spheres of the region’s economy is, undoubtedly, an advantage in this regard.

What do you anticipate for the Scottish commercial property market in 2017?

On a local level, given the uncertainty surrounding the performance of the oil industry and the up and coming increase in rating liability, 2017 will present a number of challenges. The Chancellor’s announcement regarding a 12.5% cap on rates increases is welcomed, albeit, it may only offer a temporary relief for business owners. Notwithstanding, there is plenty to be positive about.  Significant investment in local infrastructure, the AWPR, City Region Deal and evidence of construction projects underway herald an era of opportunity for investors. Predictions that the oil industry will stabilise and show meaningful signs of recovery towards the latter half of the year are bringing these opportunities forward.  Elsewhere, the country continues to benefit from post-recession recovery with medium to long term investment fuelling the appetite for growth.

As a thought leader, how are you currently lobbying or working towards the development of new commercial property strategies, in order to effectively assist your clients?

By engaging with trade/business representatives, professionals and intermediaries on a variety of levels, we maintain a valuable insight into the challenges and opportunities facing the economy. Remaining alert of the continuing emergence of a more positive outlook for the region, we support the recognition of opportunities presented by investment in infrastructure and emergence of globally recognised skills in other industries such as bio-tech, life sciences, tourism and food and drink – all of which will encouraging an appetite for growth and investment for the medium to long term.