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Spotlight Scotland’s Residential Property Market Autumn 2015 Savills Research UK Residential savills.co.uk/research
SpotlightScotland’s Residential Property Market Autumn 2015
Savills Research UK Residential
savills.co.uk/research
This publicationThis document was published in September 2015. The data used in the charts and tables is the latest available at the time of going to press. Sources are included for all the charts.
Glossary of termsn Prime: refers to the most desirable and aspirational property by reference to location, standards of accommodation, aesthetics and value (second hand £400,000 and above). Typically it comprises properties in the top three per cent of the Scottish market by house price.n Mainstream: refers to the bulk of the Scottish housing market.
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Autumn 2015
The market is adjusting to fiscal changes, as comparative value stimulates buyer activity
Scotland’s Residential Property Market
Despite some political and taxation changes, overall Scotland remains an attractive place to invest in real estate. This includes key sectors of residential property as well as rural and commercial markets (as demonstrated on p.5 & 6). Scotland remains comparatively good value for money, and this is the key driver in the majority of buying decisions.
The introduction of LBTT (Land and Buildings Transaction Tax) has particularly impacted the residential market. The replacement to SDLT, which was introduced on 1 April 2015, has contributed to the growth of Scotland’s mainstream residential market, but delayed the recovery of the prime sector in the medium term. Edinburgh is the exception to the rule, where the prime market is attracting buyers from London and overseas who remain cautious about investing outside the capital.
One year on from the Referendum on Scottish Independence, there has been a notable transfer in balance within the residential property market north of the border, with a shift to bottom up growth.
During the summer of 2014, the Scottish property market was
recovering from the economic downturn. The prime residential market was leading the way in the resurgence, with a growing demand for properties above £400,000, particularly in key property hotspots. Consumer confidence was beginning to ripple out, both to other locations and to lower price bands.
However, the Referendum raised a number of difficult questions, and the resulting uncertainty stalled the property market. This was felt acutely at the top end, the bracket that had long been boosted by the prevalence of London buyers. A year on, this key target group remains anxious about LBTT and the forthcoming Scottish Rate of Income Tax.
In addition, both UK and Scottish Governments have introduced initiatives to support the lower value sector of the market in an attempt to revive both the house building industry and buyers on the early steps of the property ladder. Buyers of homes below £400,000 are now receiving further assistance in the form of favourable rates of LBTT. Meanwhile, buyers of more expensive homes are taking on the burden of the new progressive taxation in Scotland.
ExEcuTivE SuMMaRy
MainstreamThe market is being boosted by
government initiatives and low rates of mortgage interest
PrimeRegional activity will remain limited,
unless there is a significant downward shift in values in country locations
Other asset classesScottish commercial property is providing
investors with greater relative income returns, while rural property continues to tempt buyers from south of the border
Source: Savills Research
FIGURE 1
Prime and mainstream markets Five year values forecast
2015 2016 2017 2018 2019 5-yearPrime residential GB regional
1.0% 6.0% 5.0% 5.0% 5.0% 23.9%Prime residential Scotland
0.0% 2.0% 3.5% 4.0% 4.0% 14.2%Mainstream residential UK
2.0% 5.0% 5.0% 3.0% 3.0% 19.3%Mainstream residential Scotland
3.5% 4.0% 4.0% 2.5% 2.5% 17.6%
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Spotlight | Scotland’s Residential Property Market
East Lothian, East Renfrewshire and East Dunbartonshire and also in Aberdeen, which saw the most expensive sale since April this year at £2.78 million. As the economy improves, and buyers from both sides of the border adjust to the new taxation structure, we expect this upward trend to continue. While the million pound market is beginning to recover in Scotland’s capital, buyer activity in more provincial locations remains subdued. Even taking into account the additional burden of LBTT, Scotland remains excellent value for money compared with other parts of the UK.
Million pound market Scotland’s million pound market has felt the biggest brunt of the new taxation changes. The vast majority of sales in this bracket completed prior to 1 April, before LBTT was introduced. While there has been a slight uplift in activity in recent weeks, sales have mostly been focussed on the core locations of Edinburgh,
There were 15 sales at £1 million and above in Scotland registered between May and July 2015, compared with 42 in the same period last year, representing a 64% annual drop. Only 11 sales completed from the period April to July this year. Two of these came from outside Scotland, including one from England. Interestingly, in normal circumstances, a third of buyers at this price range originate from outside Scotland (see Figure 2).
Prime marketThere were 639 prime sales which registered in Scotland at £400,000 or above between May and July this year. This compares to 925 sales in the same period last year, representing a drop of 31%. Edinburgh remains the hub of Scotland’s prime market, accounting for 37% of sales between May and July this year. A closer look at different price bands within the prime market shows varying levels of performance. The overall 31% drop in prime Scottish sales was mainly due to a sharp fall in activity above £750,000. The number of sales in this price band fell from 117 between May and July last year to just 46 over the same period this year, representing a 61% drop. Edinburgh accounted for 13 sales above £750,000. The level of LBTT for sales between £750,000 and £1 million in Scotland is on average 84% higher compared to the current Stamp Duty Tax applicable across the rest of the UK and 80% higher than the previous structure operating before December 2014 (see Figure 3). In the longer term we expect prime regional activity to remain limited, unless there is a significant downward shift in values in country locations, in order to match the level at which buyers are willing to transact, bearing in mind the additional burden of LBTT. This may go some way towards jumpstarting the residential market in rural locations, allowing both downsizers to move, and younger people to upsize.
international buyersInternational buyers have not been put off by the changing political climate and continue to see Scotland as an investment opportunity. The proportion of such buyers has remained stable compared to last year. The majority of international
“The million pound market is beginning to recover in Scotland’s capital” Savills Research
Source: Savills Research / MyHousePrice.com
FIGURE 3
Prime Scottish sales recovering, but only up to £750,000
n £400,000 to £750,000 n Above £750,000
500
450
400
350
300
250
200
250
200
150
100
50
0
Sec
ond
han
d s
ales
Jan-
14
Feb
-14
Mar
-14
Ap
r-14
May
-14
Jun-
14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
No
v-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Ap
r-15
May
-15
Jun-
15
Jul-
15
LBTTintroduction
Source: Savills Research / MyHousePrice.com
FIGURE 2
Million pound sales drop following the introduction of LBTT350
300
250
200
150
100
50
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
dur
ing
SD
LT
2015
d
urin
g L
BT
T
60 64
124
163
289
235
106
145 139125
137 146
120
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Autumn 2015
RuRaL MaRKETScottish rural property is attracting buyers from all over the globe, with a total pool of approximately £300,000,000 chasing farms and estates in Scotland. Political and legislative uncertainty slowed last year’s market, with only nine estates selling, compared to more than twice that amount in a typical year. There are a number of lowground and sporting properties new on the market and we anticipate a greater number of sales being completed in 2015, compared with last year, with a number having already been agreed. This is proof that the appetite for Scottish estates remains unabated, particularly from foreign climes.
Shrewd buyers may consider 2015 as an opportune time to secure their properties ahead of the stronger competition that may arise. Scotland is offering terrific value for money and will need to continue to do so in the current climate to overcome any potential concerns that buyers may have. A better understanding of the Land Reform changes is helping to allay concerns from those who had been holding back. The uncertainty posed by Common Agricultural Policy (CAP) reform and poor weather restricted the volume of farmland coming on to the market in the first half of 2015, with low supply upholding
values. Current values are closely linked to location, land quality and the residential weighting of the farm and there is a widening value gap between the most and least sought-after land. Prime arable land is likely to sell for between £7,500 and £9,000 an acre, while secondary land might reach between £5,000 and £7,500. There is a shift in buyer profile with the farmland market now being driven by farmers rather than investors. Savills Research projects average UK farmland value growth of around 4% per annum over the next five years. English buyers are continuing their close interest in Scottish farmland, spurred on by the record value gap.
International buyers continue to see Scotland
as a safe opportunity
Source: Savills Research
FIGURE 4
Prime values continue to rise in core city locations
120
115
110
105
100
95
90
85
80
75
70
Sav
ills
Prim
e In
dex
2007
2008
2009
2010
2011
2012
2013
2014
2015
n Prime Edinburgh City n Prime Edinburgh Country n Prime Tayside n Prime Glasgow City n Prime Glasgow Country
sales of residential properties are concentrated in Edinburgh, key country hotspots like St Andrews, driven by the allure of the Open Golf, and the country estate market. Buyers are investing in Scotland from a wide range of international locations including the US, Australia, China, France, India, Ireland and Italy. It would appear that for them the changes to LBTT and the political environment are inconsequential.
Market below £400,000In addition to favourable rates of LBTT and in contrast to the current challenges facing the prime market in Scotland, there is a more positive picture across the bulk of the market, priced at below £400,000. This market saw an 8% uplift in sales activity between May and July 2015 compared to the same period last year, with locations that were previously lagging, now showing strong levels of growth.
These include Glasgow City, Dumfries & Galloway, Ayrshire, Lanarkshire and West Dunbartonshire. Further growth
Heriot Row (Offers Over £2.4 million), an entire townhouse and mews house, in the heart of the New Town of Edinburgh, which continues to attract buyers from London and overseas.
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Spotlight | Scotland’s Residential Property Market
has also taken place in commuter locations, like Tayside, Falkirk, West Lothian and the Borders. Many of these areas were supported by increased new build activity and attainable prices.
Traditional hotspots such as East Renfrewshire and Stirling have also enjoyed a strong market this summer, supported by good schools, excellent transport links and high levels of affluence (see Figure 5). While lending criteria remains strict, there has been an increase in the level of mortgages granted, with the best rates restricted to those with higher levels of equity. Furthermore, various Help to Buy schemes and the gently improving economy, leading to increased consumer confidence, are all combining to support this market.
Whereas the prime market, particularly in rural locations, tends to be discretionary with buyers motivated by lifestyle choices rather than necessity, the bulk of the market below £400,000 is made up of buyers moving within Scotland, driven by the need to be near schools, work or changes in household structures. It is less dependent on buyers moving from the south or overseas for a change of lifestyle. In the longer term, we expect improved sales activity across this market to fuel a prime recovery, particularly in country locations. This will be particularly effective if there is a simultaneous readjustment in prime values outside the core hubs.
LBTT updaten Scottish Government has set itself a target of £235 million to be generated from residential sales in this financial year (2015/16).n However there was a 64% reduction in the number of sales above £1m between May and July 2015 compared to the same period in 2014.n In addition, there was an improvement of only 3% in sales activity across the market as a whole in the same period.n As a consequence of reduced activity at the top end of the market, the total LBTT generated between May and July 2015 was 31% lower than SDLT generated between the same period in 2014. n
cOMMERciaL MaRKETThe significant Scottish investment market activity of 2014 has continued this year and is providing investors with more attractive income returns relative to other parts of the UK. In addition to performance through yield shift, as a result of the weight of money seeking product, those who have invested in the key prime markets are likely to witness further strong performance. This is on the back of improving occupational markets, generating demand-driven rental growth and stimulating office development in Edinburgh and Glasgow. Investment activity in Aberdeen has reduced since the fall in the oil price. Yet, the city has some excellent yield and covenant product in the office and industrial sectors. Generally, leases in the Aberdeen market are drafted on longer terms, with guaranteed income performance through fixed rental increases. Several of the UK institutions continue to be active in what is a very competitive prime commercial market. Better quality and higher yielding product in the secondary market is also subject to some strong interest,
particularly from US investors. Despite some yield compression in relation to prime, due to low levels of stock and stronger occupational markets, Scotland still offers a discount compared to other regional cities. The actual quantum of discount on prime will be tested with Atria 1 and 2 in Edinburgh now on the market with a price tag of £100m, and an initial yield of circa 5.5%. Savills has an optimistic outlook for the Scottish investment market, as investment and development opportunities remain undervalued relative to similar stock in other UK regional cities. Private equity-backed fund managers have been purchasing core-plus and value-added office portfolios in the supply-constrained Glasgow market. These include the purchase of 1/3 Atlantic Quay for circa £61.5m, Granite House for circa £26.8m and 150 St Vincent Street for circa £15.4m. It will be interesting to monitor the level of interest from equity providers for future prime office buildings in Glasgow, as major development projects could be too lengthy for most IRR (Internal Rate of Return) focused investors.
Source: Savills Research / MyHousePrice.com
FIGURE 5
Top performing areas in the market below £400,000
25%
20%
15%
10%
5%
0%
Eas
t R
enfr
ewsh
ire
Dum
frie
s &
Gal
low
ay
Wes
t D
unb
arto
nshi
re
Wes
t Lo
thia
n
Fal
kirk
& S
tirlin
g
Lana
rksh
ire
Ang
us &
Dun
dee
Gla
sgo
w C
ity
Ayr
shire
Sco
ttis
h B
ord
ers
Sco
tland
Incr
ease
in r
esid
entia
l sal
es M
ay t
o J
uly
2015
v M
ay t
o J
uly
2014
23%
20%
18%18% 17%
15%14%
12%12%
11%
8%
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Date
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Tracy GriffithsScotland Residential0141 222 [email protected]
Lucian cookUK Residential020 7016 [email protected]
Emily DorrianScotland Residential0141 222 [email protected]
Faisal choudhryScotland Residential0141 222 [email protected]
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