Ian Woods: Sector-by-sector look at Scotland’s rejuvenated commercial property landscape

This time last year, it would have taken a large amount of bravado to look forward with any degree of optimism to the prospects for the commercial property market in Scotland or, indeed, the outlook for the wider economy.

Interest rates were rising inexorably, inflation was threatening and a recession was just around the corner according to the finest analytical minds among the economic forecasting community (yes, the ones who have got almost every major economic forecasts wrong in the last five years).

Fast forward to today and what a different picture we see. Inflation is falling, apparently quickly, interest rates are predicted to follow suit and lenders are queuing up to open their loan books to borrowers who are ready to take advantage of new opportunities.

In the last ten years, the number of funders has increased substantially. We have gone from an environment in which the market sustained only about six or seven to a situation where there are in excess of 20 banks competing for custom with a further source of funding – including bridging, peer-to-peer and crowdfunding – also active within the market.

The days of institutional reticence about lending to the small and medium enterprises (SME) sector – when major banks would impose a blanket ban on retail funding, for instance – are pretty well over and investment finance is liberally available across the sectors.

A lot of this impetus is down to the challenger banks – the ones you don’t see with High Street frontages, but which are active nonetheless – which are spotting opportunity in offering relatively affordable loans on which they can find willing borrowers at prudent and realistic repayment levels. A number of traditional funders are also active, in some cases in emerging sectors such as healthcare and again in these sectors there is some aggressive competition.

Each new entrant, and each traditional funder, obviously has a different business model and are willing to take a commercial view, seeking out sectors they like and supporting them in practical terms.

As a consequence of this more benign funding landscape, industrial space, which has historically been the poor relation of the commercial property market, is enjoying something of a renaissance and is attracting investment at a prodigious rate.

With both rental growth and capital growth in positive territory in the sector, opportunists can now afford to develop industrial buildings which for many years have been viewed as hopelessly uneconomic.

Big units are in high demand, as distribution spaces, as the shift to online shopping continues unabated, and small factories are flying out of the door as soon as they are advertised, with strong demand coming from traders, mechanics, trade counters and engineers.

The office market is changing in character, but is not by any means as inactive as might be expected. There is healthy demand for smaller space as the big financial institutions and fintech companies come to terms with the new norms of hybrid working.

There is also significant interest from enterprises which perhaps were started up in people’s homes during Covid and have outgrown a domestic setting. Not only are such entrepreneurs renting offices for storage and administration purposes, but numbers are also buying outright to put into their SIPPs on advantageous terms.

The demise of retail has been widely lamented, but properties are only dying if they are in the wrong location. You have to pity the poor traders in Glasgow’s Sauchiehall Street, for instance, as it is torn up for the umpteenth time to create “streetscaping” and cycle lanes. Recent planning decisions in this area of the city have been less than helpful for anyone who wishes to see investment and regeneration of the city centre.

In contrast, shop premises in areas in Scotland’s biggest city with healthy residential hinterlands and consequent high footfall, such as Byres Road, Clarkston Road and Dumbarton Road, are trading nicely, thank you.

High Streets in smaller Scottish towns are suffering from the exodus of national chains, but even here there are signs of the empty store fronts being scoped out by local entrepreneurs offering services for which they have identified a meaningful demand.

Speaking of empty properties, it is disheartening to see that the Scottish Government has devolved responsibility for empty property rates relief to local authorities, with the predictable effect that councils are falling over each other to abolish reliefs and garner more income from the commercial property sector.

Apart from the skewed thinking behind such initiatives – nobody wants to own an empty building; the aim is to have it occupied and earning – the effect on the vast number of empty listed buildings is likely to be significant.

It is difficult and, in some cases, verging on impossible in the current climate for a developer to bring a listed building back into use economic once the planning authorities become involved and, when reasonable applications are regularly thrown out, it is hardly surprising if they lapse into rack and ruin.

The most sensible answer to the question of what the Scottish Government could do to help the commercial property sector would be that they should stay out of it. It provides places for people to work, produce, eat, drink and receive a comprehensive range of services. It generates tax revenue for local and national government.

The fact that it is bouncing back in 2024 demonstrates its resilience. It would be to general economic advantage if it could be left alone to trade, whatever the results of the general election.

Ian Woods is partner and West of Scotland head of commercial valuation at DM Hall Chartered Surveyors