There’s a joke that Canadians like to tell Americans. It’s about a conversation between God and the archangel Gabriel. God is telling Gabriel about a new country he has made. A country with beautiful mountains and majestic lakes. A country with amazing wildlife and the opportunity to roam free, to live a happy life. “I shall call this country Canada,” says God. Gabriel looks at him and replies: “Sounds great, God, but don’t you think it’s a little unfair to give one country all that.” God smiles cheekily. “You wait until you see the neighbours I’m giving them,” he says.
It is a joke that could easily have Canada supplanted with Scotland and America with England. The opportunities for Scotland are vast, but those who live and work there are concerned its government right now is scoring too many own goals. Particularly when it comes to inward investment and delivering on growth.
At EG’s Scottish Cities Live event, held in Edinburgh earlier this month, the unintended consequences of government policy were the main topics of debate.
The panellists – Ed Crockett, director, operational capital markets at Savills, Anne Johnstone, head of ESG at NorthTree, Barry McKeown, partner & head of Glasgow office at Shoosmiths, Claire Monaghan, partner at RSM and Michael O’Brien, lead officer projects at South Ayrshire Council – all agreed Scotland and its cities had great potential.
Aside from the geographical benefits, the highly skilled and literate workforce that O’Brien points out, the country has great opportunity for growth. It has ambition to grow its cities and to lead on environmentalism. But something is threatening to hold the country back.
“Scotland punches above its weight in terms of its perception,” said Crockett, “not just within the UK but within Europe. There’s a lot of trust in Scotland as a place to invest but the frustration, the barrier, is that there has been a lot of own goals that at a political level cut against that.”
Lacking clarity
One of those own goals that Crockett was referring to was the recently announced rent freeze. A move which has turned investors away from the country.
And while Shoosmiths’ McKeown saw first hand that about-turn from investors, he said the move shouldn’t have put them off, as the detail in the policy reveals very little actual impact.
The Scottish government’s own research reveals that rents in the private sector increase by just 0.9% on average, meaning that setting a freeze at 0% in reality has very little impact, especially as the policy only applies during tenancy.
“If you do read the detail it is messy but it can work,” said Crockett. “It’s only about a rent freeze in tenancy so you could reset your rents, say every three years, even without this legislation. And that actually aligns to most institutional investors’ models, so from an investment perspective it’s not bad, it’s the rhetoric that causes the damage, not the detail.”
The rhetoric and the lack of clarity, added RSM’s Monaghan.
“That lack of clarity is just going to see investment go south of the border or further afield,” she warned. “We need to be collaborating and clarity just needs to be there so that we are clear. Then the build-to-rent sector will start to see traction. There are definite advantages to it, but things have just halted because a lot of investors, especially institutional investors, are thinking, well, why would I if we are going have this rent cap? So we need absolute clarity if we are to move forward.”
“It’s what’s going to come next,” added McKeown. “If that’s [the rent freeze policy] come out with any real thought as to the impact on the market, is it then going to be rent caps or a bit more aggressive controls next? The not knowing is what it’s going to be is the issue. If it came out and said this is what we are planning to do over the next five or 10 years, we have got to introduce this and it is going to affect rents by increasing by more than X%, then people would understand the metric in which they are valuing the opportunity. Not knowing it adds that layer of risk, which means people just don’t bother, they go elsewhere.”
Mind the gap
For NorthTree’s Johnstone, closing the gap between the thought behind government policy and its actual impact is vital for investors such as her.
“There is definitely a gap between the ambition and the policy and the regulation that is needed to give investors the certainty they need to come and make that investment,” she said. “And I think that gap has to close in order for everybody to be clear about what is going to happen and where they are going to go and where they are going to put their money. People are attracted to here. But when they get here and it actually gets down to the nitty gritty of a deal, I think in a lot of cases, it is just easier to go somewhere else.”
All five panellists understood that not all the blame for potential value in Scotland being overlooked could be laid at government’s door, however. They saw the responsibility of the real estate sector to speak up and speak out, not just about the opportunities but the challenges that investors might face, to warn government about those unintended consequences.
“There is a real opportunity because the Scottish government is very well engaged with this small community and very open to having conversations,” said Savills’ Crockett. “It’s just in the implementation of that consultation that is so frustrating. I know investors who come to Scotland as a result of that, but they have then been deterred because it has just been too difficult. But when you say, well, actually could I maybe introduce you to a government minister, there is lots you can get that traction on. It’s just about some of the owns goal they are scoring.”
Real estate players in Scotland – unlike those in its southern neighbour – have an open door on which to push. Perhaps its up to them to step up to the defence and make sure those goals are scored in the correct net.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
