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MORTON FRASER COMMERCIAL REAL ESTATE

June 2016

Scottish property investment sentiment

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FOREWORD What is the prevailing sentiment of property investors for

investing in Scotland and what is currently driving that

sentiment? What are the main criteria that can make or break a

decision to invest in property north of the border?

As commercial property lawyers, it is important that we

properly understand the markets that we operate within - we

can't give proper commercial advice without maintaining that

understanding. Many of us will have heard talk that some

property investors are turning away from London and looking at

other cities and regions to invest, or that political uncertainty in

Scotland acts as a drag on property investment, but what do

the investors themselves have to say? In order to maintain our

market knowledge, we thought that we would put that to the

test.

Morton Fraser undertook this research to develop a stronger understanding of sentiment amongst

British property investors towards investing in the Scottish property market. The process involved

using an independent research company to survey over 300 property investors, with all surveys

completed during April 2016.

As well as gauging sentiment and reasons behind investing or not, we also wanted to see how

Scottish cities fared against others in Britain in terms of their attractiveness for investment.

In the lead up to the Scottish Independence Referendum in 2014, and similarly now running up to the

vote on whether the UK should remain as part of the EU, investment in property, both domestically

and internationally, is often used for arguments on both sides of the debate. A lot has been made, for

example, about international businesses delaying investment in the UK property market thanks to EU

uncertainty. But what about British property investors? We were eager to gauge just how important

not only general political stability was, but how individual political campaigns or decisions impact

sentiment and interest in investing in the Scottish property market.

The survey results sometimes reaffirmed the position we have often heard repeated by professionals

in the market and sometimes challenged perceived "norms". In this report, we have analysed the

findings to help paint a picture of the clear drivers and barriers to investment in the Scottish property

market.

David Stewart Partner, Morton Fraser LLP 0131 247 1176 david.stewart@morton-fraser.com

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EXECUTIVE SUMMARY � One in four property investors in Britain are open to investing in Scotland, with one in 10 actively

monitoring or pursuing opportunities at the moment

� Although 70% of respondents indicated that they are not planning to invest in Scotland, given the

British audience of the survey, this compares well to Scotland's share of the UK Commercial Real Estate market (c.8.9%*) and Scotland's share of the UK's population (c.8.3%)

� Rental yield is the number one criteria for investing in Scotland

� This is closely followed by capital growth and a stable tax and regulatory environment

� 15% of property investors are less likely to invest in Scotland if it gained independence from the UK – double those who are less likely to invest in Scotland in the case of a Brexit (7%)

� However, in most cases the political status of a nation is not a key driver, and investors are more

attracted by rental yield and capital growth

� Over one in three property investors say that a yield premium would persuade them to invest in Scotland

� Of those who would be more likely to invest in Scotland if the yield premium was higher, almost 2

in 5 would expect that premium to be over 3%, and up to 5%

� A further 31% of all respondents suggest a premium over 5% is needed to convince them investing in Scotland was worth it

* based on 2015 figures posted by CoStar and the Scottish IPF

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CHART DIRECTORY Chart no. Chart Title Page No.

1.1 Current appetite for investing in the Scottish property market 5

1.2 Overall sentiment: interested vs. not interested 5

1.3 Important criteria for investing in the Scottish property market 5

2.1 Likelihood of investing in Scottish property if Britain left the EU 7

2.2 Likelihood of investing in Scottish property if Scotland gained independence 7

3.1 Importance of yield premium of decision to invest in property in Scotland 9

3.2 Level of yield premium that would encourage investment 9

5

11%

70%

19%

1.2 Overall sentiment: interested vs. not interested

Interested/planning to invest

Not interested/not planning to invest

Ambivalent/Don't know

56%

14%

14%

9%

2%

5%

0% 20% 40% 60%

Unfavourable

Weak

Ambivalent

Interested

Active

Don't know

1.1 Current appetite for investing in the Scottish property market

INVESTMENT SENTIMENT Appetite for investing in Scottish property is strong with one in four property investors in Britain

surveyed open to investing in Scotland. Just over one in 10 (11%) are actively monitor or currently

pursuing opportunities. When viewed in a UK-wide context, this compares favourably to Scotland's

8.9% share of the UK commercial real estate market.

What is the most important criteria for investing in the property market in Scotland? Those surveyed

indicated that rental yield is their number one criteria, followed by capital growth and then a stable tax

and regulatory environment. Despite regular market chatter about the drag on investment in Scotland

caused by political uncertainty, investors themselves appear to be saying that there is a price point at

which investing in the Scottish market overcomes any perceived drag. More on that later.

Although issues surrounding Scottish independence were raised by 21% of the respondents, the

topical Brexit question attracts much less interest amongst investors at 15%. None of this is to say

that Scottish independence or Brexit will not cause a period of uncertainty with investment decisions

being postponed, but it does suggest that in the longer term, those who wish to invest in the UK

and/or Scotland will continue to find a way to do so.

46%

31% 30%

26%

23% 23%21%

19%

15%

7% 7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Rental yield None of these Capital growth A stable and

predictable

tax/ regulatory

framework

Political

stability

Earnings

growth

Scottish

independence

Availability of

properties

located in city

centre

locations

If Britain leaves

the EU

Scottish gross

domestic

product (GDP)

figures

Don't know

1.3 Important criteria for investing in the Scottish property market

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7%

85%

7%

1%

2.1 Liklihood of investing in Scottish property if UK left the EU

Less likely No impact More likely Don't know

15%

79%

5%

1%

2.2 Liklihood of investing in Scottish property if Scotland gained independence from the UK

Less likely No impact More likely Don't know

POLITICAL IMPACT: BREXIT AND SCOTTISH

INDEPENDENCE In 2014 Scotland voted to remain part of the UK, following a passionate independence referendum.

Despite this result, question marks remain over Scotland’s place in the UK. Following its success in

the recent Holyrood elections, First Minister Nicola Sturgeon’s Scottish National Party (SNP) has

reaffirmed its desire to recommence a discussion on Scottish independence in the summer of 2016.

But how does Scotland’s potential to become independent from the UK impact on the likelihood of

property investment?

Results (2.1) shows that Brexit remains a

largely neutral issue for property investors -

there is an even split amongst those less

and more likely to invest if the UK left the

EU and the vast majority (85%) deciding it

has no impact at all. This may simply be a

reflection of the respondents being most

comfortable with investing in the UK; a

similar poll of mobile overseas investors,

less fixed on the UK market could produce

a different outcome.

That said, many see an increased likelihood of Scottish independence as a direct consequence of the

UK voting to leave the EU, and it is notable that 15% of property investors would be less likely to

invest in Scotland if it gained independence from the UK – that is double those less likely to invest in

Scotland in the case of a Brexit (7%). It is not surprising to see greater competition within the

constituent parts of the UK for property investment vs competition between the UK and the rest of

Europe.

As the graphs 2.1 and 2.2 show, the

political status of a nation is generally not a

key driver for investors, who are, in the

main, more attracted by rental yield and

capital growth.

This response may be driven by those

seeking to take advantage of any short term

volatility in the market.

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29%

2%

54%

7%0%

10%

20%

30%

40%

50%

60%

More likely Less likely No difference Don't know

3.1 Importance of yield premium of decision to invest in property in Scotland

5%

16%

39%

31%

9%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Up to 1%

More than 1%, up to 3%

More than 3%, up to 5%

More than 5%

Don't know

3.2 Level of yield premium that would encourage investment

SCOTLAND'S YIELD PREMIUM The survey respondents identified yield to be the singular most important criterion in determining

property investors’ appetite to invest in Scotland. Given some of the barriers to investment, however,

what kind of a return would investors be looking for? A total of 37% said they would be more likely to

invest if the yield was higher in Scotland versus an equivalent property located in England and Wales.

However, more than half (54%) said that it would make no difference to their decision to invest in the

Scottish property market.

If yield is an important criteria, what would make the real difference to actively encourage investors to

look to Scotland? How can yield help investors to overcome political uncertainty or concerns over

capital growth? The benchmark seems to be a premium of 3% or higher. When those who said they

would be more likely to invest in Scotland if there was a higher yield premium were asked to think

about future investment in Scotland, and comparing it with other regional cities located in England and

Wales, 70% of property investors said a yield premium over 3% would most likely encourage

investment. Anything less than this, and the commercial opportunity is a harder balancing act.

These results include those who are fundamentally "cold" on Scotland (70% of respondents), so they

do show that if the numbers stack up, many investors are prepared to overlook ideological or

secondary issues to run the rule over Scottish property investments. It is also worth noting that the

"yield gap" between Scotland and other regional cities in the rest of the UK will vary depending on the

quality of the property in question - general themes can be drawn, but quality stock will always stand

on its own merits.

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SUMMARY

Viewed in context, Scotland represents c.8.3% of the population of the UK and c.8.9% of the UK

commercial real estate market. As such, results showing 25% of respondents leaving the door open

to investing in Scotland and 10% actively pursuing investment opportunities is much more positive

than it can appear at first blush. There will always be a need for investors to select where to focus

their interest and with 12 major trading regions in the UK (including London), Scotland is still holding

its own.

Brexit could well have an impact, at least in the short term -- our research does not seek to identify

whether investment decisions might be delayed in the event of Brexit; we think that would inevitably

happen -- although most respondents appeared to take a more measured approach in the medium to

longer term as the "political risk" questions provoked less of a reaction than might have been

expected.

Echoing the general sentiment felt in the industry, the impact in Scotland is likely to be increased by a

vote to exit the EU bringing to the fore increased discussion of another independence referendum,

which in turn is likely to bring with it a period of uncertainty in the market while the pluses and

minuses of independence are debated once again. Some investors are, however, clearly very

interested in Scotland, and a few see positives flowing from independence. That may be due to

regional patriotism or a desire to take advantage of any temporary dip in the market as unconvinced

buyers seek their exit.

Aside from the Brexit and independence issues, politics do not directly feature in any significant way

in the decision whether to invest in Scottish property, but of course politics do influence economic

decisions and when those decisions impact on rental yield and capital growth, the market reacts. So

long as the price is right and the market conditions in Scotland are favourable or at least on a par with

other regional areas across the UK, the Scottish real estate market should continue to attract

investment. Investors therefore seem willing to set aside ancillary concerns and follow the returns.

The property correction in 2008/2009 saw a huge adjustment in rents and capital values right across

the regions, and Scotland was no exception. Indeed the market for non-prime property in Scotland

outside of Glasgow and Edinburgh remains some distance away from the 2007/early 2008 highs.

Progress is being made on that front, however. Although our research does not attempt to predict the

scale of any further adjustment which may be required by a Brexit or another Scottish Independence

referendum (or indeed whether such an adjustment is inevitable), it does show that despite the

potential for ripples around and flowing from these important issues, investor appetite remains.

That gives us optimism for the future of the Scottish real estate industry.

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METHODOLOGY All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 311 British property

investors. Fieldwork was undertaken between 5th and 11th April 2016. The survey was carried out

online.

MEDIA CONTACT

For all media enquiries, copies of charts or image requests, please contact Grayling:

MortonFraser@Grayling.com or call 0131 226 2363.

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