Scotch mist

In a badly performing property market, the private sector and the entrepreneurial community often lead the way in any sort of recovery, with the blooming, yet smaller companies and local traders seeking to do better than the existing market who are weighed down by fear and debt.

We are now seeing this in Scotland with new businesses seeking cheap, often serviced accommodation in good locations with flexible terms that allow them to come and go as they choose if it suits their business model. Landlords will have to learn to adapt to this and accept that a five-year break is a long time.

In essence, investment values are less of a concern – cash flow and occupation are more important.  As landlords, we have little pricing power. The incentives trend higher and the rents trend lower – tenants are increasingly savvy about what they can get for themselves in this market and we are seeing smaller businesses and SMEs seeking to crystallise good deals with landlords, extracting the best terms in return for concrete stability and guaranteed cash flow.

Scotland is able to offer advantageous terms in larger sites like Maxim with impressive incentives that cater for those with broad imaginations. But with a fundamental shift in government spending announced by the Chancellor and Finance Minster, John Swinney, losing what little capital they have left trying to retrench the public sector to make the books balance. Hence we fairly certainly won’t see big government requirements. In fact, it promises to be quite the reverse with civil servants looking to reuse grey space and give up as much as possible.

With the UK Plc also some distance from a full recovery, despite new players like Virgin and Tesco entering the banking market. Furthermore, uptake on prime space locations is still attracting interest but lease terms are a long way from the heady days of 2006.

That said, impressive buildings in great sites in important locations will always eventually let and tenants have never had it so good. Recent agent talk is that prime locations are now becoming fully occupied and that a squeeze is imminent due to a lack of supply, which we feel is a fairly suspect, ambitious declaration.

At Unicorn Property Group in Dundee, we have developed and are marketing the 50,000 sq ft River Court, which is part of the larger Dundee One development that has changed the shape and dynamic of the city’s waterfront.

We expect this development to let well over time but it has specific conditions which should facilitate this. Its location, its proximity to the new Victoria and Albert Museum and to Dundee’s Renewable Energy Hub and its unique site and status in a city not overburdened with Grade A office space.  Due to the increasing faith in investing in Scotland, we feel confident letting a speculative office block in the face of shrinking budgets and greater competition elsewhere.

Work and play
On the leisure side, we have seen hotel developer interest picking up.  This year seems to have been a decent year for hotels. Performance levels in Scotland have remained resilient, outperforming the rest of the UK, but much of this strength is based upon Glasgow, Edinburgh and Aberdeen greatly supported both by those cities’ leisure tourism and commercial sectors.

In Dundee, the halo effect of the renewables industry and the V&A again are stimulating interest and project planning with a slew of opportunities expected in 2011. Clearly, as the lacklustre economy continues and stretches out into 2011/ 2012; consumer and business spending will be under increased pressure and one can only speculate what effect that might have on hotel occupancy. Therefore, we would expect to see more new entrants to the market looking at the budget end of the spectrum. We will see more hostel-like hotels and ultra cheap no-frills accommodation for the leisure traveller and the equivalent for business.

Innovation is important and should really characterise the period of austerity and recovery. Businesses that do not radically revaluate and re-engineer their business models – or at least adjust to the realities of the new age of economic stringency – will risk failure. The property sector is generally slow to react to subtle changes in the market and the ostrich approach often prevails.

New enterprises driven by entrepreneurial individuals typically emerge in these times of austerity to exploit opportunities presented by old businesses failing. A litany of corporate difficulty in the property world over the last three years will see new more nimble ventures rise, though this is going to be harder now than ever before.

With senior debt in short supply and mezzanine costing the earth, equity and often private individuals traditionally have picked up the burden.  But we all know very high net worth figures who have been burned in the last three years, may never want to enter this market again – no matter how attractive some investments look.

But, for every reaction there is an equal and opposite reaction. We are enduring a severe response to the heady millennium decade that saw record rents and land values which where ultimately unrealistic and unsustainable. If history teaches us anything, it will be matched by an equally (or even greater) unrealistic declaration of the end of the property sector as we know it and the end of Western free markets.

But we will need a benign and supportive tax regime that encourages and rewards enterprise both in property and in the wider community, because it is enterprising individuals that innovate that will differentiate the Scottish business community in 2011 from the depression of 2010.

The market remains fragile and 2010 has been a generally bad year for the property industry: not as bad as 2009, and I hope not as good as 2011.  We suspect that we shall have to wait until 2012 before a balance is achieved and business can look forward to normal activity.  When things where really bad in 2008, someone said to us that it would be the Olympics that marked the end of the down market – it seemed so long away then; yet now it is only around the corner.