COMMENT Confidence in Scotland’s real estate market has boomed over recent years. Investment has increased across all asset classes, with £1.2bn of commercial property deals completing in Scotland during the first six months of 2022 alone.
That same momentum has been felt in the residential development sector, where demand for housing continues to outstrip supply. The current annual average for homes completed in Scotland is 17,000 – significantly lower than the 25,000 estimated to be needed every year.
It is therefore no surprise that Edinburgh and Glasgow were ranked as the top UK locations for investors looking for residential investment opportunities. The disruption of Covid-19 and consequent rise in construction costs inevitably reined in this optimism, with investors, funders and developers adopting a more cautious approach during Q2-Q3 2020. However, if the impact of a global pandemic caused a short-term deceleration, with investor demand soon bouncing back, the economic and political turmoil of recent months can only be viewed as a sharp – hopefully short – handbrake turn on the market.
Constraints and counterpressure
As well as the challenges thrown up by the macroeconomic climate (including a talent shortage and rising funding and construction costs, none of which are exclusive to Scotland), the evolving legal and political landscape is not providing the certainty that is required to underpin the level of investment needed to meet housing demand across all tenures.
The Scottish government’s recent Cost of Living (Protection of Tenants) Act brings in a temporary rent freeze and moratorium on evictions and also provides for increased damages for unlawful evictions, until at least 31 March 2023. These measures are aimed at providing greater temporary support and protection to tenants during the cost-of-living crisis.
The importance of helping the most vulnerable people in society cannot be overstated. The government must, however, respond to any unintended consequences the Act could have on the Scottish real estate sector and housing supply, as well as the economy and society.
While the full impact of the legislation is yet to be seen, any further drop in housing delivery is only likely to exacerbate the imbalance in residential supply and demand. This shortage is already being felt more acutely in certain parts of the Scottish rental market, including purpose-built student accommodation, where students are facing the prospect of deferring studies or commuting significant distances due to a lack of nearby suitable accommodation.
There are no instant solutions. It is, therefore, mission-critical that all stakeholders operating in the living sector avoid knee-jerk reactions and instead focus collectively on raising awareness of what is required to prevent any further impact on the economy, society and, in turn, those the Scottish government is trying to assist through the legislation.
An effective emergency legislative programme should aim to support the most vulnerable people in society in the short-term, while balancing this against the requirement to provide the opportunities for investment and development north of the border in the long-term.
Back to basics
It may sound like an oversimplification, but in an uncertain market, a successful business is likely to be one that maintains its focus on the factors within its direct control and is prepared to be nimble in the face of external influences such as evolving policy, interest rate rises and changes in consumer demands and needs. Identifying and addressing short-term risks is paramount, but should not come at the expense of decision-making with a longer-term view.
Over the past few months, access to affordable finance has become increasingly challenging for developers. To mitigate its impact on the success of a scheme, many developers are adopting a proactive and innovative approach – taking steps to strengthen their relationships with existing funding partners and also considering alternative routes.
While the implementation of the Building Safety Act 2022 in Scotland differs from England and Wales, the introduction of the Building (Scotland) Amendment Regulations is already having a significant impact north of the border.
New rights of action and extended limits for claims are now in force, though the Scottish government continues to assess its approach. This includes consideration of an alternative to a levy introduced on the development of all residential buildings in England, unless exempted, to ensure the industry contributes to fixing historical building safety defects.
As set out in the Scottish government’s 2021 Heat in Buildings Strategy, the sector must also prepare for requirements on energy efficiency in buildings. Alongside potential reform of the EPC system itself, the strategy outlines plans “to introduce regulations requiring that all residential properties in Scotland achieve an energy performance certificate rating of at least equivalent to EPC C by 2033, where technically and legally feasible and cost-effective”.
Developers, operators, investors and funders must remain aware of the potential influence these legislative changes could have on successful project delivery. They bring major cost and operational implications and there is a danger that immediate disruption may distract from future preparation. Businesses that are on their toes and acting now will have an edge.
Do look up
In times like these, it can be hard to see a clear path forward for the sector. We must, however, recognise why the commitment of the real estate industry in Scotland is so strong.
By holding tight and taking the time now to identify routes through and over these obstacles, investors, developers and operators can put themselves in a robust and primed position.
Asset classes such as build-to-rent, PBSA, affordable housing and traditional residential all have a vital role to play in meeting housing demands in Scotland and driving an economic bounce-back in the coming years.
Where there are challenges, opportunities also exist and by managing short-term risk effectively, medium to long-term growth and returns can be found in Scotland’s living sector.
Janette Speed is a real estate partner and head of Shoosmiths Scotland
