Galbraith Commercial Matters Issue 12 2023

Welcome to

It would be fair to say that 2022 has been a year of two halves. The Commercial Team at Galbraith has had a busy time and across our various business streams have been involved in some really interesting deals and projects, some of which are highlighted in this issue.

Thinking back to this time last year, the UK was still affected by the tail-end of Coronavirus restrictions and, although it seems strange to say now, in Scotland restrictions were not fully lifted until April of this year.

Through the first half of 2022 most commercial markets were doing well. The Industrial and Logistics sector was really firing and there was massive investor demand for the sector. Investors were dipping their toes back into the office sector as workers returned to their offices and a bit more confidence was apparent. It was still possible to buy some retail parks at comparatively high yields, although less so than the year before as the resilience of this sector through the pandemic was evident and investor demand continued to increase. The hospitality sector had started to rebound well from lockdown woes and traditional retail with good fundamentals was improving too, where rents were rebased or switched to turnover becoming more sustainable for the longer term. Across all sectors ESG remains an important focus.

We first really felt the headwinds we are now all so familiar with at

the beginning of June when numerous deals began to fail across the market on the back of economic forces coming into play. Debt rates increased exponentially and its availability significantly reduced. Some deals were pulled and the ones that did happen mostly did so at prices below those originally agreed. The impacts caused by the war in Ukraine, Brexit and the hangover from Covid all continue to affect the market to various degrees.

Deal volumes in the second half of the year reduced dramatically although there have been some really interesting deals done as opportunistic cash-rich purchasers have been able to find value where fundamentally good assets have had to be sold. We see this picture continuing for the short-term into next year and, as a business, determine to remain alive to opportunities for our clients whatever they may be.

Tangible Benefits of The Green Premium

(Industrial Buildings)

What is meant by the term ‘The Green Premium’? Essentially, this is the ability of an asset to command a higher price due to its energy efficiency and sustainability credentials.

Today’s concept of The Green Premium is in its infancy and there have been limited formal studies concluded to provide early evidence of it, however, estimates of future green premiums range from 5% to 30% of Capital Value.

Institutional investors are increasingly focused on delivering a positive impact on society through their investment strategies. As of 2021, asset managers representing $37 trillion of assets, or one third of global assets under management, have committed to being carbon neutral by 2050 or before.

The increased investor focus reflects a deepening concern of the climate urgency that pervades society, particularly among

millennials. As younger generations gain in wealth and corporate influence, the Environmental, Social, and Governance (ESG) focus is likely to intensify.

Regulatory pressure to measure and report the climate impact of investment portfolios is increasing too. Although carbon disclosure initiatives such as the Task Force on Climate-related Financial Disclosures started as voluntary, the direction of travel is towards

mandatory disclosure and reporting, as is now the case for UK pension funds. This trend is part of the global momentum for stronger ESG disclosure, exemplified by the recent Sustainable Finance Disclosure Regulation in Europe, and is permeating through the rest of the market.

Although the climate change topic has been around for decades, investors, occupiers, developers and lenders are concentrating on ESG strategies and practical applications to help properties become more sustainable both now and throughout their lifecycle. This momentum is leading industrial buildings to evolve. Previously, industrial buildings

often providing huge spaces for industrial and distribution businesses, were created with little thought to the environment and the people who worked in them.

Today, these buildings are being thought about very differently. The green credentials of a building, the social impact on employees, including the nearby accessible labour markets and the positive benefits for the wider markets and society as a whole are now a firm focus.

For example, warehouses, which require relatively modest investment in maintenance and energy efficiency enhancements, could be considered a highly sustainable asset class.

It’s estimated that 50% of a building’s whole life carbon emissions come from the development phase. It is therefore crucial that buildings last as long as possible in order to minimise their lifetime carbon footprint.

Industrial buildings are, by their very nature, hardy, functional things built of resilient materials which last a long time and which require relatively little maintenance when compared to other more complicated buildings such as offices.

As with all property the fundamentals such as location, access, configuration, proximity to labour market etc. are still

important to the sustainability of industrial buildings but if these are present then - even with changes in occupier demand over timethey are flexible enough to be used by a range of different businesses carrying out many different functions.

Even older industrial buildings can be upgraded and improved from an environmental perspective relatively easily and at relatively low cost. If this can be achieved there are tangible benefits which are worth something to both landlords and tenants including immediate energy savings. If occupiers taking longer-term lease obligations are occupying an energy efficient building they will also benefit from aspects that may be difficult to monetise. Such benefits include being protected from climbing energy prices and, if renewables are involved, a degree of self-sufficiency.

Simply put, it is these tangible benefits of a new building or an existing building which has been upgraded relative to older less efficient stock which are the catalyst for The Green Premium to exist going forward. n

Summit Point at Hamilton International Park where photovoltaic cells and electric vehicle charging have been added to an existing industrial unit to improve its environmental credentials and reduce energy costs.

Investment volumes stood up remarkably well, despite the effects of the Covid-19 pandemic. The five-year average prior to 2020 was £2.13 billion, buoyed by quite exceptional transactional volumes in 2018 (peaking at £2.46 billion). A number of large-scale office investments certainly contributed to this.

There was a decline in 2020 with recovery for 2021 and 2022 looks promising with year to date volume at £1.39 billion with 102 transactions. We feel that the recent increase in cost of debt will however slow this 2022 trajectory.

For both 2021 and 2022 UK institutions do not appear in the top 10 ranking (of total spend), conversely in 2020 a few were present (M&G, abrdn and Legal & General).

The most active buyer classifications are property companies and overseas investors (which includes REITs). We put this trend down to fewer office transactions and a greater targeting of specialist stock including BTR, industrial warehousing and retail warehousing. One must not forget that property companies / asset

management platforms are actually often funded by a variety of institutional money, but on a more discretionary allocation and often from global / overseas mandates. Although not the case in every situation, we know that property companies and overseas investors tend to utilise debt. This gives an insight into the levels debt finance that has been available at low / attractive terms over the last five years. This leverage allows enhanced returns in the right market but with changes happening in the debt and

The sun is still shining on Scotland

Ben Dobson reports on the Scottish industrial market’s upward trends.

The industrial market in Scotland continues its upward trajectory despite some significant economic headwinds. The purple patch we outlined in the Industrial Property article in our previous edition has continued and demand for good quality industrial space remains robust against a backdrop of diminishing readilyavailable stock.

Year to date industrial supply in both the east and west of the country is showing a substantial decline from the same period in 2021 with the east of the country seeing a 10%-12% decrease in supply and the west at an even higher figure of between 20% and 25%.

Edinburgh has seen a lower take-up of only 4% from this time last year, a significant change from 2020-2021 when take-up was over 20% from 2019. This can almost solely be attributed to a critical shortage of stock as demand has remained steady in almost all sectors and continued to increase in some (last mile logistics). In contrast, the west of the country has seen take-up increase to almost 27% above last year’s numbers. This has been supported by an increase in the delivery of new build developed stock, especially around the larger box markets of East Glasgow, the M74 corridor and Eurocentral.

Notwithstanding, the development pipeline across the country remains limited and, at current levels, is unlikely to provide a long-term solution to the supply problem. Occupier demand is still increasing and the immediate nature of most occupier requirements means that even competition for pre-let stock is often very fierce.

Rising land prices and build costs have added to developer uncertainty but the lack of supply and serious lack of existing fit-for-purpose stock is still driving rents forward across the board. This, in turn, has made speculative development a lot more attractive. The average new build rent for unit of

20,000 sq.ft plus has now moved to over £9.00 per sq.ft and in some areas, such as Central Edinburgh and Glasgow, rents in excess of £10.00 per sq.ft are not unheard of.

In the west of Scotland, we anticipate continued upward pressure on rents, especially with regard to bigger box developments and well refurbished distribution units. New records are being achieved on medium to large units from 20-50,000 sq.ft with rents of £7.50£8.50 per sq.ft for secondary stock becoming the norm.

Smaller box and trade counter rents have continued to increase too, with new building stock in Edinburgh now demanding as much as £15.00 per sq.ft and some less desirable locations throughout the central belt pushing prices as high as £10.00 or £11.00 per sq.ft for units of 5,000 sq.ft or less.

Over the coming year we expect these trends to continue.

In addition, other factors such as the ESG (Environmental Social and Governance) agenda and sustainability are becoming much more of a focus within the Industrial sector as they are in others. As such, it will be interesting to see how this continues to evolve within the market going forward.

There is a significant amount of old or obsolete stock within the Scottish market. Both occupiers and landlords increasingly have their own sustainability targets to reach which drives a need for better quality, more sustainable accommodation, providing additional amenity to match the needs of the modern workplace. Retrofitting older stock to provide this is not always possible, but where it is real opportunities exist going forward. n

ben.dobson@galbraithgroup.com

TEXTBOOK: Preparing for Sale

Will Sandwell reports on the best practice in sales instructions.

The commercial agency team at Galbraith sell between £100m and £200m of commercial property and land each year. As part of our textbook series, the Galbraith Commercial Team highlights some points of best practice to adopt when preparing for sales instructions.

Property Review

It is vital to fully understand the asset you are dealing with. Sometimes we sell property that we have bought or sold previously, or where we have provided advice or managed the assets for a number of years, so previous experience and knowledge is naturally in place. On occasions when we are instructed to sell property which we haven’t been involved with before, the review principles are the same. Key actions include:

• Property inspection and measurement

• Review of location (positive or detrimental surrounding development / changes)

• Planning policy (existing consents and Local Development Plan)

• Tenant audit / covenant checks

• Statutory consents and documentation

Market Review

It is imperative that all elements of the surrounding market are understood. Prevailing pricing, yields and rents are obvious factors but having an understanding of the demands and knowledge of neighbouring owners, and insight of their intentions, often creates opportunities.

Anticipation

As agents working across the whole market we act to both buy and sell property for clients. As active buying agents our experience tells us what a buyer (or their advisors) will want to see during a transaction. The best question to repeatedly ask ourselves is: What additional information is the buyer going to ask for?

• Energy Performance Certificates and related Section 63 action plans

• Detailed drawings / site plans

• Rent and service charge payment history

• Warranties for any works carried out

• M&E service records

• Insurance provisions

Legal Review

Chartered Surveyors constantly work alongside a client’s lawyer. It is imperative that pre-sale lease and title reviews are undertaken with formal legal input. Correct documentation is fundamental to property, especially for an investment asset. It is much easier to amend formal documentation prior to marketing or being under offer, without the pressure of time constraints, especially if one has to engage with a neighbouring owner or tenant.

Collation

The aim is to comprehensively review the asset with both perspective and fine detail and ensure the most appropriate presentation to the market, including suitable price. Management of the data is key as is the availability to prospective purchasers. At Galbraith, we are advocates of well populated datarooms which allows the secure sharing of information.

Outcome

It is proven that extra effort prior to any sale makes for a smoother and more efficient sales process. We have stated many times before in Commercial Matters that poor preparation for sale is the biggest reason for price adjustment or even deal failure.

Being technically well prepared allows us, as your agent, to focus on generating interest and price negotiation with confidence once a property is launched to the market. n

Will Sandwell 07801 266 373

will.sandwell@galbraithgroup.com

Galbraith welcomes Commercial Graduate Surveyor

David joined Galbraith in August 2022 as a Graduate Commercial Surveyor having completed a Master’s degree in Real Estate Management and Investment at Edinburgh Napier University.

Based in the Edinburgh office, David is working towards his APC qualification and will continue his learning by rotating through the commercial departments and gaining experience in Investment, Agency, Valuation and Asset Management.

Prior to completing his master’s degree, David worked as a pharmacist for several years. While working as a pharmacist, he developed property in his own time and this experience inspired him to retrain as a Surveyor. David’s unusual route into surveying has given him diverse experience and a unique perspective. n

David Stevenson 07917 424363

david.stevenson@galbraithgroup.com

INVESTMENT DEALS

Glasgow Gait, London Road, Glasgow

On behalf of a major REIT, Galbraith acquired a prominent 80,000 sq ft retail warehouse asset in Glasgow. The property is let to Wickes and The Range with a low site density, located just off the M74 motorway. The deal was in the region of £13m reflecting 7.25% net initial yield.

Summit Point, Hamilton International Technology Park, Glasgow

Galbraith marketed a prime single let 25,000 sq ft industrial investment in Hamilton International Technology Park on behalf of Wordie Properties Ltd. The asset is let to Scottish Gas until 2028 at £149,279 p.a. and the building has an EPC rating of A, assisted by photovoltaic roof panels. The sale attracted competitive bidding interest and sold to Scotmid for their investment portfolio at £3.10m, reflecting a net initial yield of 4.52%.

Pinnacle, Eurocentral, Glasgow

Galbraith advised the Fiera Real Estate Long Income fund on the £12.30m investment acquisition of Pinnacle at Eurocentral. The 67,751 sq ft prime modern format distribution warehouse was previously let to Eddie Stobbart and was leased to Brewdog on a 20-year lease at £450,000 p.a. with inflation-linked rent review structure. The net initial yield reflects 3.43%.

Halbeath Motor Village, Dunfermline, Fife

In an off-market transaction, on behalf of Cedarwood Asset Management, Galbraith sold Halbeath Motor Village to a private investor for £7.00m, reflecting 7.09%. The asset had been held as part of a portfolio and was let to a variety of motor-trade and trade counter tenants at a passing rent of £523,000 p.a.

One Masterton Way, Tannochside Park, Uddingston, Glasgow

Masterton Way was fully refurbished and let on a 10-year term to The Artisanal Spirits Company as a new production and distribution facility. Galbraith marketed the investment which sold to special industrial investor ARA Dunedin for £4.30m, reflecting a net initial yield of 5.57%.

Almond Road Industrial Estate, Falkirk

In an off-market situation, Galbraith identified and acquired this multi-let industrial estate on behalf of Rankeilour Properties for £3.273m, reflecting a 7.20% net initial yield. The estate provides income from a variety of strong tenants along with multiple asset management opportunities.

Cigna House, Greenock

On behalf of HKIP, Galbraith identified and acquired a 31,000 sq ft high-yielding single-let office investment in Greenock. The modern open plan office property is let to global healthcare provider Cigna at a rent of £405,000 p.a., reflecting only £13.00 psf. On an offmarket basis Galbraith simultaneously negotiated to buy in a long ground lease interest so the clients interest was unencumbered. The deal at £2.250m, reflected a net initial yield of £16.93%.

DPD Portfolio

On behalf of Riverside Capital, Galbraith negotiated the off-market sale of two prime DPD distribution units in Lincolnshire and Aberdeen. Each purpose built property was approximately 43,000 sq ft and provided 15- and 20-year lease terms. The annual rent roll was £830,000 p.a. The properties were purchased by abrdn at £20.20m, reflecting 3.84% net initial yield.

East Kilbride Retail Park

East Kilbride retail park was purchased on behalf of a private property company for £6.20m, which reflected a very attractive net initial yield of 12.55%. The park which extends to 34,898 sq ft is situated adjacent to a B&Q warehouse and occupied by tenants including Carpetwright, Bensons for Beds and Home Store + More with a weighted unexpired lease term of 5.5 years. The location, immediately south of the 270,000 sq ft Kingsgate Retail Park, benefits from one of the largest catchment populations in Scotland making it popular with retailers and occupiers alike.

Capital Park, Sighthill, Edinburgh

Galbraith represented leading UK industrial developer Chancerygate in the acquisition of one of the largest and most prominent industrial development opportunities in the last decade. The 7.5-acre site will be developed into 146,000 sq ft of last mile logistics and industrial accommodation with a GDV in excess of £30m.

AMG Portfolio, Greater Glasgow

Under a competitive bidding situation, Galbraith advised Vardy Property Group on the acquisition of two single-let distribution warehouses within the greater Glasgow conurbation, both let to AMG Group. The total accommodation extends to 64,000 sq ft and was let off particularly low rents. The portfolio was acquired £3.25m / 6.60% net initial yield, reflecting a low capital rate of only £51 per sq ft.

Sainsbury’s Local, North Deeside Road, Aberdeen

Galbraith sold this 12,000 sq ft prominent convenience store in an affluent and popular area of Aberdeen on behalf of a private client. The property was bought by a private investor for £2.93m, reflecting a yield of 7.38%. The property was let to Sainsbury’s for a further nine years providing an annual rent of £230,00 p.a.

74 Black Street, Glasgow

Galbraith acquired this 25,000 sq ft single industrial property on behalf of a private property company for £1.415m, reflecting 8.39% net initial yield with the benefit of six months remaining on the existing lease. The property is located on the fringe of Glasgow’s Central Business District, neighbouring the M8 and will be refurbished and re-let.

Darrows Industrial Estate, Bellshill, Glasgow

This 58,000 sq ft multi-let industrial estate in a prime location was acquired off-market on behalf of a private property company for approximately £3.00m, reflecting a yield of 8.97%. It offers the opportunity for intensive asset management.

Lee’s Foods, Coatbridge, Glasgow

On behalf of Mileway, Europe’s leading industrial investor, Galbraith acquired a 90,000 sq ft manufacturing facility let to Lee’s of Scotland for a further 17 years with tenant break option in year 12. The lease provides RPI linked rent reviews. The deal reflected £7.40m / 5.70% net initial yield.

Units 1-5, Seafield Trading Estate, Longman Industrial Estate, Inverness

On behalf of Wordie Properties Limited, Galbraith marketed this prime location multi-let industrial estate for sale as an investment. Extending to 22,500 sq ft it is let to five strong tenants with a wault of 5.11 years and producing £160,000 p.a. The estate sold to an Inverness based private investor for £2.66m, reflecting 5.68% net initial yield.

Menzies Distribution, York

Acting on behalf of Custodian REIT, Galbraith identified an off-market opportunity to purchase a 29,000 sq ft prime location single-let distribution unit in York. The asset was bought for £2.62m / 5.90% net initial yield.

Thornbridge Distribution Centre, Grangemouth

Having acquired the investment for Topland four years ago and following asset management, Galbraith were instructed to sell the Thornbridge Distribution Centre. The investment provided 86,992 sq ft of accommodation on a 6.33-acre site. The property was let until 2040 providing 18.25 years term certain income off a passing rent of £388,261 p.a. with inflation linked rent reviews every five years. The property was sold to Custodian REIT for £7.49m reflecting a 4.86% net initial yield.

London House, London Road, Edinburgh

On behalf of a private client, Galbraith sold this central Edinburgh office on an off-market basis to an overseas government to cater for a future consulate requirement. The building attracted £2.75m, reflecting a yield of 3.80%.

Carntyne Industrial Estate, Glasgow

Galbraith identified and acquired Carntyne Industrial Estate on an off market basis on behalf of a private property company. The 100,000 sq ft multi-let asset provides a refurbishment and asset management opportunity and was acquired for £3.24m, reflecting 8.59% net initial yield.

Menzies Distribution, Wade Street, Dundee

On behalf of long-standing client Cedarwood Asset Management, Galbraith sold a 30,000 sq ft single-let industrial investment to Custodian REIT for £1.90m, reflecting a 5.90% net initial yield. The property offers a reversionary opportunity being let to Menzies Distribution for a further four years at a passing rent of only £3.97 psf.

Whitefriars Industrial Estate, Perth

Following open marketing and competitive bidding, Galbraith sold Whitefriars Industrial Estate for £790,000, reflecting a 6.73% net initial yield. The estate is located within the town centre and offers a high demand asset management opportunity. The purchaser was a private property company.

Former Power Station, Cockenzie

On behalf of East Lothian Council, Galbraith negotiated an option agreement over a six-acre site to accommodate a substation for Seagreen 1A Offshore windfarm. This is the second deal agreed for the client in the location with Galbraith also negotiating a similar transaction for the Inchcape Offshore windfarm.

Neighbourhood Retail Parade, Mid Road, Prestonpans, East Lothian

On behalf of London & Cambridge Properties, Galbraith acquired a modern format retail parade anchored by Co-Op for £1.33m, reflecting a yield of 7.11%. n

112 George Street, Edinburgh

Acting on behalf of Promethean Investments, we advised on the acquisition of the ground floor suite at 112 George Street, Edinburgh. Following a comprehensive search, we found and negotiated terms on a 796 sq. ft office on a five-year lease.

AGENCY DEALS

41 Thistle Street South West Lane

On behalf of CBRE GI, Galbraith secured Whiskey Merchants Trading as a new tenant into 41 Thistle Street South West Lane at a rent of £66,726 per annum.

20 Castle Road, Falkirk

Galbraith successfully acted on behalf of the landlord Holland House Electrical, on the lease renewal to Ainscough Cranes at 20 Castle Road, Falkirk. A 10-year extension with a mutual break option in year five at £35,000 per annum.

Maxxium House, Stirling

Acting on behalf of a private Landlord, Galbraith aided in the heritable disposal of Maxxium House to Emblation Ltd for a price of £1,750,000. This equated to a rate of £85 per sq. ft on the 20,496 sq. ft office building.

7 Beaverbank Business Park, Logie Mill, Edinburgh

On behalf of a private client, Galbraith was instructed to market this office property and a heritable offer was agreed upon at £875,000 to the neighbouring occupier, Petroleum Experts Limited.

This represented per square foot rate of £233 ex VAT for the 3,908 sq. ft building.

25 Hardengreen Industrial Estate

Galbraith successfully advised the landlord on the letting of 25 Hardengreen Industrial Estate, a modern standalone industrial premises extending 11,787 sq. ft. The building was acquired by The Energy Training Academy (Edinburgh) CIC at an annual rent of £80,000.

36 St Claire Street, Edinburgh

Acting on behalf of Watwish Properties Ltd, Galbraith secured a 10-year lease extension of 36 St Claire Street to Stax Trade Centres Ltd at a rent of £201,650 per annum reflecting a rent of £8.75 per sq. ft for the 23,045 sq. ft industrial unit. This represented a significant increase in rent from its previous base level.

Bankhead Steading, Dalmeny

Over the last 18 months, Galbraith have been involved with a number of lettings at Bankhead Steading, a converted farm steading set around a communal courtyard located on the edge of South Queensferry, which provides office/workspace accommodation. Deals have been agreed with Beamish International Ltd, Alba Turf Equipment, and Sequentec Ltd.

8

Seafield Road, Inverness

Galbraith negotiated the lease of this 16,401 sq. ft industrial unit to Highland Industrial Supplies for a period of 15 years at an annual rent of £128,000 ex VAT. The unit was to undergo some significant refurbishment before lease that is being project managed by the Galbraith Building Services team.

110 George Street, Edinburgh

Acting on behalf of The Vardy Foundation, Galbraith was able to advise on the leasehold acquisition of 1,445 sq. ft of prime grade A office space in Edinburgh’s golden rectangle. The five-year lease included one car parking space.

11A Dublin Street, Edinburgh

Acting on behalf of MNH Limited, Galbraith successfully let 11A Dublin Street to Aver Corporate Advisory Services Limited. A 10-year lease was agreed with a tenant-only break option in year five at a rent of £26,700 per annum.

There have been a surge of activity with eight new lettings so far in 2022. Deals have been agreed with TGA Ltd, Claremont Furniture, Lustre, the Social Cow, Continuity 2 Ltd and Ben Ferguson, with a further 10,801 sq. ft under offer. Pamela Gray, Partner and Asset Manager, said: “These lettings reflect the stature of this 69,000 sq. ft office for which there is continuing market interest. The benefits from having a full time Building Manager, an on-site café, Wi-Fi throughout the common areas and extremely generous car parking have played a major part in securing these lettings. Given the increased number of viewings in recent months it demonstrates the importance of continued investment in attracting and retaining tenants.”

125 Princes Street, Edinburgh

Acting on behalf of Cenkos Securities PLC, Galbraith sourced and negotiated terms for the top floor penthouse suite at 125 Princes Street. A new 10-year lease with break at year five was agreed for the newly refurbished suite with outstanding views of Edinburgh Castle. The seven-storey, 38,500 sq. ft retail and office building has tenants including Urban Outfitters, BDG Design Limited and The Chartered Institute of Housing.

Ardmore House, George Street, Edinburgh

2 Atlantic Square, Glasgow

Acting on behalf of Burness Paull, Galbraith negotiated a 10-year lease of the 14,814 sq. ft fourth floor at 2 Atlantic Square. This 96,650 sq. ft prime Grade A office building has six floors with 7,000 sq. ft of retail and restaurant space on the ground level. The £150 million, Grade-A Atlantic Square development totals 300,000 sq. ft across three separate buildings.

Acting on behalf of the landlord, Galbraith have negotiated a five-year lease extension with Cathcart Associates over the fourth floor, comprising a 2,242 sq. ft suite on the top floor of a multi-let office with basement car parking and coffee shop. The building has recently undergone a major refurbishment with EV Charging points, bike racks, changing and shower facilities.

Orbital House, Peel Park, East Kilbride

FAST MOVING MARKETS

Correlation Concerns

Overriding economic and political themes influence all markets and this has perhaps had a bigger overall impact than the 2020/21 disruption from Coronavirus – and manifested within a similar timeframe. Over the last six months, these repercussions have been most evident following the sharp increase in interest rates and the resultant cost of property finance.

Economic Themes

The biggest change in 2022 was the sharp adjustment in debt availability and cost in May/June, new “all-in” commercial debt quantified at 5.00%6.00% for certain commercial property investors. UK political turmoil added more pressure with a similar sharp increase on domestic mortgage lending following the commercial trend. This has had an immediate impact on pricing and liquidity across the whole market. It was 2009 when the Bank of England base rate was last above 1.50%. At the time of writing, base rates sit at 3.00%. SONIA rates (the modern daily equivalent of LIBOR) for overnight commercial interbank lending sit at 2.93% (December 2022) compared to 0.94% in May 2022 and 0.05% in May 2021. Economic historians will note we are somewhat out of sync with an eight- to 10-year property / economic cycle. A tough bucking of the trend to ignore for many.

Politics and Legislation always play a part in property decisions. The question of Scottish independence formally raised its head again in 2022. The legal ruling from the UK Supreme Court found that the Scottish Government did not have the power to implement a second independence referendum bill. The delivery of independence is questionable and most property investors remain aware of the risk. Generally, markets don’t react to perceived uncertainty. We anticipate the recent ruling provides more positive certainty and, therefore, a more stable landscape. From previous experience of providing advice amidst an independence debate, strong property opportunities tend to outweigh the political uncertainty. We also see potential for stark change in regulation in terms of rent control in the residential private rented sector (PRS) which has attracted a weight of institutional money in recent years. This stems from the cost-of-living crisis and long-term lack of supply around new housing.

Well reported and unprecedented inflation is a real issue across the UK. There are various mechanisms in property investments to hedge against inflation, but there is often a lag. Those investors with property rent reviews which track inflation (RPI/CPI) will benefit from positive rental uplifts, but there is a cautionary tale. Consistent fixed uplifts can create over-rented property, which doesn’t support good valuation fundamentals. High rents will drive value, assuming a stable yield, but a high rent is only useful if a tenant can afford it.

Commercial Investment Partner Will Sandwell explores the changing landscape of market sub-sectors and looks forward to 2023 and beyond.

Sectors

The UK industrial and distribution market has seen stellar performance over the last five years of rental growth combined with yield compression. It remains an attractive sector. Pricing in the south has cooled as prime yields hit 3.00% in Q4 2021 / Q1 2022. It took less than three months to see an absolute pricing change in the industrial sector. There are still many strong elements to this sub-market but pricing was at an all-time high, so the negative impact perhaps feels greater. The weight of global institutional money targeting the sector seems to have sustained, indeed with some funds sighting a new rationale, and being more opportunistic following the softening of yields. We anticipate continued performance in the sector through rental growth, fundamental supply and demand imbalance, and the relatively low value of standing stock versus new build cost.

Retail remains polarised and market challenges were emphasised during Covid. The high street (including leisure) struggled while accessible modern format retail warehousing prevailed. Footfall is down and this isn’t a new trend, but we have seen, subject to softer rents, some very exciting progress in prominent high street and Central Business District locations. Retail warehousing and parks are still attracting strong yields (5.50% - 6.50%) and seen as defensive income. Shopping centres have suffered with major

price adjustments from historic highs. That said, investment volumes are surprisingly positive in 2022 and we expect to see profitable performance recorded within the sector going forward where specialist asset management is executed.

With such a broad pricing spread, prime high street retail is back in favour in certain cities, but we would suggest this is due to geography and core fundamentals, especially where full buildings can be bought and where rents have been re-based. Secondary retail remains a challenge and generally out of favour for many.

The real challenges and diversification route for city and town centres are more varied than this snapshot article allows, but the crux of the matter is that we must not forget the inherent value and opportunity of core property, especially retail in Central Business District (CBD) locations. Flexible landlords who are willing to work more closely with their tenants will succeed in this arena, as will property owners who have the finance available to re-purpose their properties.

The office market faces its biggest change since working from home (WFH) practices were introduced during lockdown and is a heavily debated sector. We see a notable spread on pricing in the current market. Quality CBD assets range from 4.50% to 8.50% headline yield pricing from what sometimes seems like a minor differential at first glance.

Social change and expectations means utilisation of the office has to change. Occupancy has been reported as down, but over what timeframe? Property or leases are not able to fluctuate with daily or weekly occupancy. As agents in the Scottish office market, we have seen a stark increase in occupier accommodation budgets, with a huge focus on quality and productivity of office space. This sits neatly with many corporate Environmental, Social and Governance (ESG) agendas. The prime market has seen solid rental growth at the same time. Moving away from prime, and with an eye on inflation and talk of recession on the horizon, we also see a place for cheaper secondary stock which could perform quite well. From a pricing perspective though, owners and investors need to be mindful of regulation around energy performance ratings. Legislation in England is more prohibitive than Scotland, but in both regions it is going to be difficult to lease or sell buildings that don’t hit a certain energy performance rating. Professional office investors are well aware of this and modernisation costs must be factored in from day one when looking at new acquisitions. This is already evident in office sales launched in 2022. We are confident the office sector will remain a peak performer in the UK market and a key part of our diverse urban conurbations.

Alternative Sectors all need quite specific thought and advice, but generally we anticipate a consistent demand with potential for limited

yield volatility. Sectors such as Student, PRS, Hotels, Motor-trade, Long Income and Ground Lease investment have provided excellent diversification and attracted good interest when openly marketed. With a diverse buying pool most assets attract strong liquidity if priced correctly and can be key tool in any portfolio.

These property market cycles and sub-market trends are easy to assess retrospectively, especially with reliable and wellmanaged data. There are arguments for and against a focused specialist investment approach compared to a traditional portfolio theory, which includes diversification. In a changing market, with a broader spread of pricing, it is a lot harder to see or anticipate correlation. Perhaps, with faster market fluctuations, a narrower or specialist approach is more risky? Equally, decisions and investments have to be made and often the wise business owner, tenant or investor takes a step back and considers property decisions with a longer-term perspective.

Overall, we saw transactional volumes slowed and completions stalled drastically over the summer, mainly due to the sharp

adjustment in debt terms coupled with a traditional summer slowdown. We don’t anticipate reporting a Q4 2022 bounce back in trading volumes as many investors review allocation strategies.

We can now prove a general negative shift in pricing and liquidity but, as always, this is a generalisation and it comes down to individual property specifics. Property risk premium and debt arbitrage will be back in play with a very real future “pricing in” for ESG compliance.

We anticipate a good release of stock for sale in H1 2023 but vendors should have an eye on purchaser track record and performance over and above highest price. The landscape of higher yields and expensive debt could be very advantageous for UK institutions, who have been relatively quiet for a number of years, but this is contingent on them having cash allocations available. The potential deployment of this equity across the different property sectors will depend on their own forecasting and research papers. n

Will Sandwell

07801 266 373

will.sandwell@galbraithgroup.com

NEED TO KNOW:

The future for the termination of commercial leases in Scotland

Those involved in commercial leasing transactions throughout Scotland know only too well how complicated and misleading the current rules governing lease termination can be for landlords and tenants alike.

Generally, there are three types of leases available in Scotland: residential, agricultural and commercial. The termination of residential and agricultural leases are controlled through heavy regulation whereas commercial lease termination is considered outdated.

Currently, commercial leases include a date by which the lease is due to end - also known as the ‘Termination Date’. It is often assumed by landlords and tenants

that this is the date the lease will end and the property will be returned to the landlord with vacant possession.

In Scotland, however, this is not the case as either the landlord or the tenant must give advance notice should they wish the lease to end. This is known as ‘Notice to Quit’. Either party must issue this notice at least 40 days prior to the lease termination date.

If neither party serves notice, then the lease will automatically renew on the principle known as ‘Tacit Relocation’.

Tacit Relocation is a principle whereby if sufficient notice is not served, a lease which was entered into for a period of a year or more

will continue on the same terms for another year, while a lease with a duration of less than a year will continue for the same duration on the same terms.

In May 2018 the Scottish Law Commission (SLC) published a discussion paper and review on the main issues with the current termination of Scottish leases, including Notice to Quit and Tacit Relocation. This led to a draft Leases (Automation Continuation etc.)(Scotland) Bill being produced by the SLC, which it’s hoped will bring some modernisation to the statutory regulations for landlords and tenants.

Lucy Yates reports on the proposed changes to current regulation.

The proposed changes to the current regulation include:

1. Tacit Relocation will be known as automatic continuation

2. Leases will still automatically continue by default unless;

i). Contracting out by requesting appropriate provisions when agreeing the lease

ii). Either the landlord or the tenant make it clear they do not want the lease to continue on the same terms

iii). The landlord or tenant gives a valid Notice to Quit

3. The minimum period for serving a Notice to Quit will be 90 days, an increase on the current 40 days

4. A number of technical changes which should give more commercial certainty when serving notices.

Commercial landlords who are prepared to serve a Notice to Quit during a lease renewal negotiation as leverage will lose a valuable tool, especially when the notice is served as late as possible. Equally, the longer timescales proposed reduce the risk of a tenant being trapped or indeed being evicted at short notice.

We see the proposed change as fair and a modern update but might suggest it goes a long way from providing statutory security of tenure benefits. Indeed, in reality and practically for many occupiers 90 days versus 40 days is little compensation for vacating and changing business premises.

While the law in relation to the termination of commercial leases in Scotland may be subject to change in the near future, the SLC final draft bill is due imminently. Although these changes are considered necessary to provide clarity and security in the market, the process remains complex. It is imperative that both landlords and tenants seek professional advice 12 to 24 months before the end of lease in order to comply with current lease obligations and legislative requirements within the correct timeframes. n

Lucy Yates 07824 848 097

lucy.yates@galbraithgroup.com

Residential Development Land Market

In recent months, the news pages have been filled with the rising cost of energy and the widely reported build cost inflation, which challenges the property and development industry. Despite this, demand for residential development land in good areas in Scotland’s Central Belt remains very strong. This, coupled with a lack of consented and allocated sites coming through the planning system, has led to fierce competition for sites when they come to the market. The national housebuilders are still the most active and competitive in the land market and benefit from greater economies of scale that can offset some of the build cost inflation that a medium sized developer would not be able to achieve.

We remain cautious that land values could be subject to downward pressure if current trends continue, ultimately being linked to the affordability and financing of the end housing product. We have already

experienced the impact of build cost inflation outstripping sales values in marginal market areas.

Other headwinds include the implementation of the Fourth National Planning Framework (NPF4) which will focus on development of brownfield land ahead of greenfield land release and local development plan cycles shifting to 10 years rather than the current five-year cycles.

Accordingly, there are going to be fewer opportunities to allocate land through the planning system in what is already a constrained market with a lack of land supply.

This has led to national housebuilders seeking opportunities in more peripheral market areas, and indeed technically challenging sites, which they would not have considered previously in order to fill their pipelines.

The strategic land opportunities remain resilient to the current economic challenges due to their long-term nature, and

housebuilders and land promoters are still actively seeking opportunities in the expectation that they will be able to “ride out the storm” and the current market challenges will stabilise. Strategic land opportunities are, however, potentially more exposed to environmental regulation and the likely introduction of Biodiversity Net Gain requirements in Scotland, further planning gain requirements and building regulations.

We are of view that, under the current market conditions and changes to the planning system, capacity for further growth is limited. We expect that demand for short term consented sites will remain stable due to the lack of supply, but consented opportunities due to the lack of supply, but in the longer-term land values are likely to come under increasing pressure. n

07909 978 644

harry.stott@galbraithgroup.com

Harry Stott

Harry Stott comments on the challenges and the outlook for the residential development land market.

Harry

Stott

Ecological safeguarding and sensitive planning for Lion’s Face

Working as part of a wider project team, Galbraith have recently secured planning permission for Invercauld Estate for a development of eight small industrial units at the disused Lion’s Face quarry to the north of Braemar in Aberdeenshire.

The project began following identification by the team of unmet local demand for smallscale commercial space in the area. Realising straight away that such a development would likely not be suitable within a village, a search for sites outside of the settlement boundaries was conducted and the Lion’s Face quarry was quickly chosen as a location.

Working closely with the Cairngorms National Park Authority, work then began on the planning case for the project. Ecological safeguarding was an immediate priority and surveys were conducted to check for protected species such as otter, pine marten and red squirrel. Fortunately, it was possible to design a proposal which used the site’s advantages as a cleared brownfield area within the National Park so as to minimise any impact on the area’s ecology.

As with any development many other challenges were faced, such as designing a safe junction into the site and investigating the site for any contamination from its previous uses. By setting up and co-ordinating the multi-disciplinary project team, Galbraith ensured that the expertise was always at hand to deal with the wide range of issues involved with planning and designing the development.

Having addressed all of the technical and planning issues, the planning application went to committee where permission was unanimously granted, paving the way for the delivery of the units which are expected to be completed in the next 3 months.

The completed Lion’s Face Business Units will provide the community with much-needed small commercial units and allow local businesses greater flexibility to diversify and expand while making a previously redundant asset a productive space. n

Etienne

etienne.murphy@galbraithgroup.com

Accordingly, there are going to be fewer opportunities to allocate land through the planning system in what is already a constrained market with a lack of land supply.

Etienne Murphy explains the successful journey to planning success for Aberdeenshire business units

Calum