Scottish commercial property after the credit crunch
The commercial property sector provides an unsung contribution to everyday life in cities. With the Scottish economy now dominated by services and office employment the supply of offices of the right quality in the right location and at the right price is an essential basis for the competitiveness of cities. Shops and leisure facilities too contribute to the quality of life by providing social infrastructure, and to the economy by retaining and attracting a highly qualified workforce. But quantification of the commercial property sector’s role in the economy is complex, not least because it is difficult to define and there are no comprehensive government statistics.
It is also important to remember that commercial property has a dual function, first offering space to occupiers but the rental income generated means that it is also an investment. Many of the large commercial buildings in city/town centres are owned by financial institutions and large property companies. These ‘investment grade’ properties in Scotland are often owned by investors from outside Scotland. Similarly, Standard Life, a large financial institution based in Scotland, will own properties all around the world.
This blog is based on our report just published by the Scottish Property Federation that examines the direct role of commercial property in Scotland. It draws on a wide range of statistical sources to present the impact of the commercial property sector on the Scottish economy. The report also considers how the sector has recovered from the property market collapse of 2007/2008. Key findings are now discussed.
The Significance of the Sector
The sector is an important component of the Scottish economy: the total contribution of the commercial property to Scotland’s overall output (GVA) in 2012 was just under £6bn or 5.3% of Scottish GVA. This contribution has fallen since 2008, when it was £9.31bn, but is still significant in its scale. A major factor in this reduction has been the fall in construction output post-2007.
The commercial property sector is also a major source of tax income. Tax generated by the sector represented just under 7% of the total non-North Sea Scottish public sector revenues in 2014 (excluding National Insurance contributions and VAT). A recent study suggests that net-VAT related to the activities of the sector represented 4.1% of the total net VAT in the UK in 2010. If this is applied to the most recent estimate of the VAT receipts in Scotland of £10.06bn the amount attributable to commercial property is £412m. While VAT currently accrues to the UK Government it has been proposed by the Smith Commission that the Scottish Government should be assigned a share of Scottish VAT receipts.
Commercial Property Market Trends
Performance over the last ten years has been dominated by the impact of the global financial crisis. In parallel with the rest of the UK the capital value of the commercial property stock in Scotland fell by 30% between 2007 and 2009, from the top of the property boom to the bottom of the subsequent bust. Taking a longer view values fell from £51bn in 2005 to £46bn in 2013 suggesting that the Scottish market has not yet totally recovered from the system shocks of 2007.
Similarly while the industry is also showing some signs of revival in terms of output and new orders the evidence suggests that it has still not been fully rejuvenated after the effects of the dramatic downturn following 2007 and the subsequent recession. Orders overall began to improve from 2011 but they had still not recovered to 2006 levels by 2013. The commercial property element of direct employment has also fallen since 2007, from 65,000 to 60,872 in 2013 (on a like for like basis).
The Scottish Sector and Economic Growth
The office stock as a proportion by value of all commercial property stock in Scotland is higher than any other region of the UK except London, reflecting the importance of the office economy to Scotland. However, the proportion of investment grade office stock is lower than other parts of the UK suggesting that this may represent a constraint on future economic growth. This issue is reinforced by current weak (re)development levels. The report estimates that some 2.9m sq ft of office space and 6.2m sq ft of industrial stock need to be replaced annually to prevent the nation’s business stock ageing unacceptably. There was a shortfall in 2013 in the replacement rate required of around 0.84m sqft for offices and around 5.9m sq ft for industrial stock.
In contrast the proportion of investment stock in the Scottish retail sector is much higher than other provincial regions, reflecting, in part, the place that Glasgow and Edinburgh have as important retail centres in the UK.
Colin Jones and Ed Trevillion
To read the full report click here.
To read an article about the research from the Sunday Herald click here.