The Scottish Economy: A Positive Outlook

December 19th 2019

Miller Mathieson, CBRE

The Scottish Economy: A Positive Outlook by Miller Mathieson, CBRE Managing Director, Scotland & Northern Ireland.

While the UK and Scottish economies continue to experience positive but low growth, the outlook for Scotland’s main cities is good. GDP growth statistics from Oxford Economics suggest a very positive outlook for Glasgow and Edinburgh over the next three years with Aberdeen also improving. The Glasgow numbers are clearly helped by announcements around major government hubs as well as the Barclays and JP Morgan office projects. The UK figures for the same three years produce an average of 1.6% lower than Edinburgh and Glasgow for the same period.

Which leads me to the reasons for Scotland’s positive outlook:

In the education sector we have incredibly strong universities in all our cities. Edinburgh and Heriot Watt are fully aligned with local and national government on all the initiatives around AI, robotics and data while Glasgow is part of the way through a £1bn capital investment programme. Strathclyde is leading the charge on engineering and has linked up with the Scottish Government on the Advanced Manufacturing Innovation District next to Glasgow Airport.

Tourism is booming with visitor numbers increasing at all our major attractions. It is a great problem to have that we may be struggling to cope with the numbers but let’s embrace it and use it to our advantage. Our hotel sector has some of the best occupancy rates in the UK with Edinburgh 2nd and Inverness 3rd. We have new additions to add to the itinerary for visitors with the V&A in Dundee and the Macallan visitor centre in Speyside. Our Airports are growing and passenger numbers are increasing – they are a great barometer of our economic health.

City Deals have been secured across Scotland and we have to capitalise on these with more than £3bn committed from Scottish and UK Governments, and private partners. It is encouraging to see that the projects around the country cover a combination of infrastructure projects as well as innovation around digital technology, data and creative industries.

We have some of the biggest and best development projects in the pipeline with the St James Centre in Edinburgh due to complete in 2020 providing more than 800,000 sq ft of retail, leisure, hotel and residential space. We have the announcement of the new office complex for JP Morgan Chase in Glasgow at over 270,000 sq ft. This, along with the 300,000 sq ft office development at 177 Bothwell Street being delivered by HFD is a massive vote of confidence in the city. We have the new events complex, P&J Live, newly opened in Aberdeen that will offer 500,000 sq ft of multi-purpose space and 3 hotels. We are now beginning to see some momentum in the BTR sector with some major schemes particularly in Glasgow.

Visuals for St James Square, Edinburgh. Due for completion in 2020.

Everyone agrees that technology, innovation, data and sustainability are key themes for future-proofing any city economy.

Our indigenous developers and property companies continue to create some of the best developments with notable successes for HFD Group, GSS, Chris Stewart Group, Drum, Knight Real Estate and the like alongside other major developers such as Artisan, Parabola, L&G and BAM. Our development community is active and operating at a high level – we just need more projects.

Fundamentally people want to live and work and invest in Scotland – what a great building block to have.

The markets themselves have remained buoyant in 2019 with approx. £1.6bn of commercial real estate transactions to the end of Q3, a fraction down on 2018 but relatively robust compared to the rest of the country.

The office sector remains popular with major transactions especially in Edinburgh with the sale of 4-6 St Andrews Square and 2 Crewe Toll for a combined £220m.

We have also seen some major BTR fundings and there continues to be strong demand for student and hotel investments.

Over the last two years overseas investors have been 40% of the market albeit this percentage increases when just looking at Edinburgh and Glasgow. A strong sign that Scotland continues to appeal to investors from across the globe.

We have an acute shortage of space in Edinburgh and Glasgow. In Edinburgh we have only 300,000 sq ft of Grade A space available in the city centre (less than 2% vacancy). It will be almost two years before there is an increase in supply via the development pipeline. Glasgow arguably has an even bigger issue having had the highest level of Q3 take-up in 10 years.

Aberdeen still has a significant over-supply but there is a recovery happening. This has been bolstered by the 50000 sq ft deal to Oceaneering, the largest office letting in Aberdeen in the last three years.

The net effect of all this is healthy rental growth in Edinburgh and Glasgow over the last two years with further growth anticipated over the next 2-3 years.

There are four key challenges that we must address in order to maximise our potential:

Workforce – where are we going to find the skilled workforce and where are they going to live? Population growth is needed for a strong economy and the forecasts for Scotland are low (except for Edinburgh) before Brexit. There is expected to be a marked decline on immigration – we need to work harder than ever to retain our best talent. How will we continue to attract major investment from the likes of Barclays and JP Morgan if we run out of workforce.

Development – Fraser of Allander Institute have estimated that for every £100m of development there is a further benefit of £73m in wider economic benefits. In the last few years we have seen a decline in the number of major planning applications. Yes, finance is tough but we need development to achieve growth. It would be particularly pleasing to see a finance solution for a lot of our SME developers and housebuilders. Perhaps the much-heralded Scottish National Investment Bank can be part of the solution. I have to compliment the Scottish Government on their approach to development by the introduction of 100% rates relief on any new development until occupation with a further 12 months relief to the first occupier. Schemes with a value of more than £1bn are already benefitting from this incentive.

Infrastructure – we need to have a more effective delivery mechanism for all forms of infrastructure, covering transport as well as technology and social infrastructure. I look across the proposed projects from the various city deals and I like what I see with Data Innovation, Transport and Housing at the heart of many plans but we need delivery quickly.

Planning – a clear, strong, streamlined planning system is critical to our economy. We have our new Planning Act in place and both public and private sector need to make it a more inclusive, efficient and consistent service that encourages developers to engage in our opportunities.

If we do not find a solution to these challenges then we will lose out to other cities and countries around the world.

We have many reasons to be cheerful amid the maelstrom of political events.

Our two major cities are in good economic health and due to out-perform the rest of the UK over the next three years.

Our property fundamentals are strong with good tenant demand and strong rental growth especially in office sector.

And we have a diverse pool of investors – both overseas and domestic and we are seeing major investment from employers such as Barclays and JP Morgan.

JP Morgan's 27,000 sq ft building will house 2,000 tech staff in Glasgow.
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