This business report deals with the analysis of commercial real estate market conditions in Scotland. The demand and supply theory in the real estate market context is included in this report for assessing the future market conditions. The economics, dynamics and interactions between use, investment and development sectors are discussed for analyzing the factors that influence trends of the commercial real estate market.
A review of the UK and Scottish economies over the past 5 years
In the UK real estate industry the depressed market conditions affect the growth potential. Changes in Interest rate influence the real estate industry also. As a capital intensive industry, the commercial real estate market is affected by the ongoing financial recession. In both public and private markets, the cost of capital is determined by the interest rates and spreads. The general economic conditions, especially capital market conditions have direct influence on the real estate industry. (Property snapshot 2009).
The real estate markets in UK was overturned in 2007 as a result of the financial crisis arising from increased lay offs and stoppage of provision of super bonuses for the purchasers. The house prices in 2008 have declined by more than 10%. The difficulty in refinancing as a result of the credit crunch and increased interest rates has lead to the increase of repossessions in the industry. Thus the situation has worsened further. Adjustable rate mortgages became bad debt. These factors lead to the weakening of the real estate industry of the country. It is expected that the credit crunch will be continuing with the dumping of the real estate market. (European real estate in 2008 2008).
The transactions in the retail market of commercial property in Scotland decreased by 0.9% in the beginning of 2009 compared with 2007. In 2008 it showed an increasing trend of 0.8% and in 2009 it got back into the declining trend. Even though there is fall in sales volume across the retailers due to the discounting price of retailers in the recession time they maintained their market with huge profit. That is an usual model of recession where the values of the products achieve good return.
Investment Market: The IDP Annual Index said that the profit-making property of Scottish recorded a total return of 2109% in 2008. It is higher than the UK commercial property. In UK it is only 22.1%. “Demand for industrial investments in Scotland during the review period has been patchy and remains adversely affected by the pricing and restricted availability of finance, although the wider recessions also a significant influencing factor.” (Ryden 2009, p.16).
An analysis of the current economic health of the real estate markets
The GDP growth of the UK economy is contracted by 1.9% and it is in the weaker stage than anticipated. The confidence among the investors over the assumptions in the budgetary document has diminished. As per the latest forecasts, the GDP growth of the economy in 2009 will be -4%. The government budgetary figures estimated -3.5%. The business survey figures of the UK Eurostat exhibits improved confidence among the investors and consumers. The consumers are hesitant to make bulk purchases and at the same time the employment confidence is firm. The service industry is in improved position in the first quarter.
The CPI index is showing 2.9% and it is high due to the weak position of the Sterling. The oil prices remain stable and the RBS forecasts expect that the base rates will be 0.5% up to 2010. The economic conditions will be improved when the long term government bonds and corporate bonds are made available to the investors.
In the property market, the transactions are showing downward trend. In March it was £2.2bn and in April it got reduced to£644m. The number of deals also reduced from 86 to 52. The average deal size reduced from £20.1m in Q1 09 to £12.1m in April. The lending practices continued and the banks are not aware of ways of reducing the losses.
In the retail sector of the housing property, the institutions are interested in prime products and its availability is limited. Secondary stock is badly affected by reduced rental charges and void risks. The availability of retail park activity is reduced. The stock is limited. The buyers in the market are institutional investors. In the high street the demand for the properties for food stores is highly increased. The earnings from the investment on prime shop are about 5.25% to 6% based on the lot size.
In case of office property, the available products are limited. The major purchases in the industry are made by foreign investors. From these investments, long term secure earnings are expected. In the industrial property market the deals mainly concentrated on the prime and long let products. The estimated yield from these investments is around 8%. In the UK Mortgage sector, the credit crunch has negative effects as the availability of easy credit mortgage deals is reduced. The Central bank took steps to ease the financing terms for improving the liquidity in the market. This will not help reduce the credit crunch in the housing mortgage field in the UK economy. Thus it is expected that the housing market of UK will fall short by the increased foreclosures.
The credit crunch negatively impacts the UK mortgage banking sector. “The mortgage banks stock price has fallen from recent highs of £12.58 to recent lows of just £6.20, a drop of more than 50%. Trading on a PE of just 7.5 and a yield of 4% may now make the stock seem enticing, but the mark down is in anticipation of the much higher risk of mortgage defaults and repossessions in the UK as the housing market starts to nose dive.” (Market trends – property money business consumer n.d.).
These increase the foreclosures in the housing mortgage sector and it badly affects the earnings and profitability in the mortgage banking sector. The bad debt provisions have very much gone up due to these reasons.
Economic Outlook of Scotland
The current recession is distressing the industrial property in Scotland. The low supply of industrial property helps to improve the market. Oversupply of property resulted in reduction of the rental income of landlords and it forced them to adopt the flexible terms. The current market focuses to sustain fair rental levels for good quality of stock and other items. Otherwise the poor quality of stock will lead to the decline of rental levels.
The main reason for the increasing industrial property is that cash buyers and investors enter the market and overcome all the declining opportunities. The following table shows the Scotland industrial supply and Take up. The gross Domestic Product decreased by 0.8%. “The Scottish Government has stated their interest to move forward infrastructure projects worth an estimated £230 million as part of their economic recovery plans. It is hoped this will create around 4,700 jobs, whilst injecting some fresh stimulus into the economy.” (Ellis 2008, p. 2).
Estimation on Future Performance of real estate market in Scotland
The Scottish property market shows slight improvement. The values of the capital property are highly reduced at a rate of 14.7%. The major factor behind this is the lack of confidence of the investor resulting from intensified financial crisis. The property value in the Scottish market diminished to 26.2%. The strength of economic growth in 2008 has moved backwards into a quick recession. At the end of 2008 the Gross Domestic Product increased by 1.4%. That time UK growth rate was 1.9%. It is higher than the Scottish GDP. The other sectors such as service sector extended by 2%, production sector 0.9% and construction sector sustained its down twisting and diminishing by 3.4%.
The economic growth estimates are for decrease in output of 2.6% in 2009 and 2010.
During 2009 the rate of unemployment in Scotland is 3.8% and it will increase by 0.3% in 2010. The real estate business in Scottish was 39% or 3497/. In second half of 2008 this business accounts totalled 9013.But in 2007 it decreased by 10%. Even though the depressing economic climate and increasing unemployment are causing job losses in electronics, paper and food and drink these are to some degree being neutralized by new investment in transport, media etc. The office property in Scotland is on a declining stage. The starting of office has increased when the supply has increased. In Glasgow the overall availability of office property has increased by 23% to 251585 sq.m. “New development completions to end September 2009 will provide 62255 sq.m of additional city centre Grade A office space. Of this around 11948 sq.m has been let or is under offer during construction. A further 24980 sq.m of Grade A city centre new development is set to complete between September and the end of 2009”. (Office property n.d., p. 2).
Discussion justifying the predictions both concerning economic theory and to recent market and economic evidence
More than 90% of the mortgage loans in the UK banking sector are carrying floating interest rate and it is expected that the interest rate will be increased from the existing 5.75% to 6 % over the years. The strict norms and conditions for getting the finance from the landing banks will affect the mortgage sector in the economy and thus the housing market will fall further. The availability of funds for investing in the housing market will be reduced and it will badly affect the housing market.
The rests adopted by Arms will further influence the consumer behaviour in the market and thus the borrowing will be greatly reduced as they cannot get easy finance from the lending institutions. The credit crunch will be further strengthened due to these open actions of the Arms. The criteria for getting loans from financing institutions will be made further stringent and thus higher interest rate will be charged against the borrowings. The interest rates of Bank of England and mortgage interest rate also will be increased. The reports on the mortgage industry reveal a decline in the demand for new mortgage approvals at a rate of 27% compared to previous year. The liquidity is reduced and thus the borrowers are facing crucial and strict refinancing conditions.
The credit crunch impacts the UK housing market by losing the city bonuses. In the City of London, the buyers of the housing property mainly rely on the bonuses for repaying their loans and interest as their income is not able to cover the loan and interest. Thus the lack of bonuses in the economy will affect the buyers in the housing market and thus the London house prices will be depressed. It influences the entire UK housing market. It is expected that the UK home repossessions will be continuously increasing in future also.
Micro environment
Micro environment consists of the factors of the company’s immediate environment, that effect the performance of the company. These include the supplies, marketing intermediaries, competitors, customers and public. Micro economics describe the theories of demand and supply. In economics, demand theory is referred as the number of goods and services demanded by customers at a price at specific point of time. It is determined based on domestic demand or market level.
Each item contains separate demand curve. These demand curves are joined together to find out the aggregated market demand. Demand curve shows the market price of goods and quantity demanded. It also explains the strategies of consumers and they are ready to buy at definite prices at any given specific market condition. “Demand in economics must be effective which means that only when a consumers’ desire to buy a product is backed up by an ability to pay for it does demand actually have an effect on the market. Consumers must have sufficient purchasing power to have any effect on the allocation of scarce resources.” (As markets & market systems 2006).
The following demand curve shows the relation between market price and quantity.
This curve shows the inverse relationship between price and quality. When price increases demand will decrease and on the other hand when price decreases demand will increase. This demand curve also expresses that the consumers will buy goods at given prices.
Supply theory
Supply and demand are two important factors in economics. Supply means the number of commodities that producers are ready to set on the market at a specific price at specific time. It is determined based on individual producer’s ability and preference. The supply curve shows the price of a goods and quantity supplied. The following supply curve makes it clearer.
Analysis of economic health of real estate market of client’s interest
The prediction concerning economic theory and recent market and economic evidence based on client’s interest:
Industrial sector in Aberdeen
In Aberdeen the unitary authority is reluctant to consent new retail expansion and it leads to shortage in the real estates market. There are several plans for retail developments which are in pending for time lag in the approval of authority. In the commercial property sector of Aberdeen, high demand is exists and it is stronger position. As an oil exploring region, industrial property market has shown strong demand in the Aberdeen region. BP’s have started new head quarters in the region for expanding the production and operation activities. The demand trend is continuing in the industrial property sector. The acquisition of property is carried on by corporations to expand the business operations. (Aberdeen commercial property market remains buoyant 2008).
The Scottish commercial property market is strengthened with the support of strong business growth in the Aberdeen region. In the industrial property market, investment activity is limited as a result of the limited supply. But there exist strong demand for investment in the sector. The strong demand from the oil and gas sector has provided opportunity for investors in the industrial property market of Aberdeen.
“A significant trend in the office and industrial markets is the willingness of owner occupiers to bid competitively for vacant accommodation – developers are finding it increasingly difficult to compete with owner occupiers who are naturally attracted by the low cost of finance and the tax advantages with SIPP acquisitions.” (Aberdeen- a matter of perception n.d.).
Prime office sector in Edinburgh
The recent survey of prime office sector states that the developing and joint with the re-pricing of main property. It has results the most of the investor desire in the city. In 2008 submit the report of prime office sector was 6.0% to 7.5%. “Nick Penny, Investment Director at Savills, comments: “Whilst investor activity has remained muted, the beginning of 2009 saw augmented investor interest, which is a reflection of the improving yield gap and the correction in pricing of prime office properties.” (Re-pricing of prime properties drives Edinburgh office investment market 2009).
In 2008 the Edinburgh’s offices take up and it getting a total of 661000 sq ft (61,409sq m,).In the case of long term average attaining 690,000 sq ft. It was very strong and its location not presently as a financial centre. It was one of the organizational centres of Scotland. The report assumes that the total availability will increase in 2009 and hit the highest point at 2.8 million sq ft (260,120).
In 2004 the total take up of offices was 945000sq ft. It increases 10% on2003. The entire office stock is anticipated at 20.7 million sq ft. It is approximately equal between the cities.
In the prime office sector of Edinburg, investment opportunity is existing. The office rents are increasing in the region and it provide profitable investment opportunity for the new investors.
Secondary office sector in Glasgow city centre
In the secondary office sector of Glasgow, the transactions are showing increasing trend. The office market transactions become an important activity in the real estate industry. Investors are highly interested in this sector as the return is assured in between 5.50% to 5.75%. In 2005, the total supply of office space within Glasgow was of 2.41 million sq ft. The supply of grade A office is limited in the region.
The growing trend in the rent for the office property will be continuing as the demand is increasing. The investors in the secondary office property are ready to take long leases and for this the landlords offer striking incentives. It is expecting that the change in equilibrium between demand and supply in the sector will lead to reducing the incentives. But it should not affect the investment value. (M8 corridor report annual 2005).
Shopping Centre or retails sector in Glasgow city centre
In Glasgow, the authority is taking keen interest in developing the city centre businesses as a core of the economy of the destination and as a leading destination for shopping. This provides profitable opportunity for the client to acquire St.Enoch Centre in Glasgow. The development activities from the part of the City Council should contribute to the economic development of the retails sector in Glasgow city centre. They formed three year development plan focused on the retail sector in the Glasgow centre. The city centre retailers and shopping centre owners are taking combined efforts to magnetize new shoppers in to the centre.
The Chamber of Commerce and the Council is supporting their efforts with attractive trade policies. For enhancing the competitive advantages of the businesses in the city centre action plan has formulated by the City Council. It is termed as BID or Business Improvement District. These factors provide opportunity for acquisition of shopping centers in the City centre of Glasgow. (Glasgow committed to keeping city centre’s competitive edge 2009).
Recommendation
The analysis of the industrial property sector in Aberdeen reveals that there exists strong demand for new investment. In the prime office sector in Edinburg, increasing demand for office property and limited supply has provided profitable opportunity for new investors. In the secondary office sector in Glasgow city centre, opportunity for profitable acquisition is in exists. In the retail sector in Glasgow city centre the City Council has adopted attractive plan for developing it as core economic centre of the region, thus the investment opportunity is strong in this sector. Thus it should be profitable for the client to go on with the acquisition project.
Conclusion
If we look at the commercial property market, there has been a remarkable growth. A review of the UK and Scottish economies over the past 5 years shows both increasing and decreasing trend in the real estate market. But for looking at the future of real estate market, we have to consider the present risks. It is seen that Scottish property market shows slight improvement as the values of the capital property are highly reduced at a rate of 14.7% due to the financial crisis.
References
As markets & market systems: theory of demand: effective demand and willingness to pay 2006, tutor2u, 2009. Web.
Aberdeen commercial property market remains buoyant 2008, Touch Oil and Gas. Web.
Aberdeen- a matter of perception: the city is filled with people who have a quiet determination to get the job done- and that’s no bad things n.d., Property Executive. Web.
Ellis, CB Richard 2008, Economic outlook: market view: Scottish property quarterly. (Provided by customer)
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst 2008, Global Europe Anticipation Bulletin: La Lettre Confidentielle de Leap/E2020. Web.
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst: United Kingdom 2008, Global Europe Anticipation Bulletin: La Lettre Confidentielle de Leap/E2020. Web.
Glasgow committed to keeping city centre’s competitive edge 2009, Living in Glasgow. Web.
Latest: house price crash news: house price statistics- UK national 2009, House Pricecrash. Web.
Market trends – property money business consumer: UK mortgage banking sector – northern rock on the brink of going bust n.d., Market-Trend.. Web.
M8 corridor report annual 2005, Knight Frank. Web.
Office property, 64th Scottish property review n.d. (Provided by customer).
Property snapshot: colliers CRE: research and forecasting: UK economy and property market 2009. (Provided by customer).
Ryden 2009, Investment market: 64th Scottish property review. (Provided by customer).
Re-pricing of prime properties drives Edinburgh office investment market 2009, news Savills. Web.