COMMENT: Despite the curve balls being thrown at the real estate sector, investors, developers and financiers can continue to find value across Scotland’s cities. All sectors – from retail, leisure, commercial, logistics, residential and rural – have their nuances and opportunities, and I wish I had the time and space to discuss all of these.
Instead, I am going to focus on a sector that is not without challenges, but has the capability to unlock economic activity and deliver social value on a huge scale by enabling multiple mixed-use schemes: Scotland’s operational capital markets, namely BTR and PBSA.
Anyone with a passing interest in real estate now knows that the Scottish government implemented a rent freeze and moratorium on evictions in October, using emergency measures. While currently in place until March 2023, it has the ability to be extended and to alter the climate for investors. However, it is essential to stress the impact of this latest intervention on the viability of Scotland’s fledgling BTR model is much less than the rhetoric suggests. The concern is that it may be loud enough to deter much-needed investors, and this will have two impacts on anyone who cares about putting high quality roofs over heads: it will reduce stock and inflate rents.
Accommodating the sector
Looking beyond the headlines, the new regulations remain aligned with the objectives of most institutional investors. Based on proven annual average in-tenancy rental growth of just 1%, the attraction of the model was never predicated on excessive rental increases within a tenancy: instead it is often the answer for funds looking for a safe investment and long-term capital appreciation to retain tenants and minimise disruption within an asset. Happy tenants make happy landlords.
The consumer demand for BTR is undeniable. The market badly needs more high-quality investors who care about delivering a great product. And the wider Scottish economy needs more projects, like Peel Waters on the Clyde in Glasgow. Here, BTR is proving its worth by unlocking an ambitious £1.2bn masterplan involving infrastructure, retail and leisure opportunities as well as a commercial district – along with the creation of 1,100 waterfront apartments including open market, co-living and a substantial build-to-rent element.
Providing much-needed homes was an essential part of this masterplan. Rather than looking for a quick return, BTR investors here are taking the long-term view, and as such will be catalysts in building a new neighbourhood.
The model works for tenants too. New patterns are emerging and the Scottish residential market has to adapt to keep up. Careers are more dynamic, jobs are increasingly project-focused, people are marrying and choosing to have children later in life, and as a result patterns of ownership are changing. BTR buyers in regional cities tend to be transient occupiers with annual UK earnings of around £50,000 and an average stay of less than two years. A large proportion can afford to buy, but choose not to. Scottish cities need to be able to accommodate this sector of the population who want to live, work, play and invest their disposable income here.
Another under-served part of the market that has been grabbing headlines is PBSA. Despite successive lockdowns and a relatively bleak economic outlook, the UK’s total full-time student population continues to expand and grew by 8% last year. Almost 560,000 students were accepted to UK universities and there has been intense pressure on student beds. Students are being forced to sofa surf, commute from afar or pay highly inflated rents for scarce flats. With so much unmet demand, the PBSA sector continues to be an asset class of choice for investors, with £4.1bn on it last year. Investors appreciate the relatively low financial barrier to entry and healthy yields, while students benefit from guaranteed security and higher quality living space.
Essential markets
Each year we publish our PBSA development league table, showing the locations we believe are the most attractive for PBSA development. Edinburgh, St Andrews and Glasgow consistently place in the top tiers due to a combination of strong student population growth, a high student-to-bed ratio and a limited pipeline. But while the premium end is well served, attracting overseas students in particular, the affordable element is not. There is real value in looking beyond city hotspots, at well-connected places where the finances stack up. While city planners may need convincing, every study proves the value students bring to regenerating areas in terms of the money they spend locally.
These occupational capital markets are essential to reducing pressure on Scotland’s residential sector, but they will only be able to provide quality homes for professional and student populations in a stable environment, where investors are seen as constructive partners and not the enemy. Everyone in the sector is striving for a healthy, functioning lettings market that increases the number of homes for rent that Scotland badly needs. Once this is fully understood by politicians, planners and policymakers, the future will be bright.
Ed Crockett is director in operational capital markets at Savills
Image © Chris Watt Photography
