The “No” vote by the people of Scotland to Scottish Independence removes some elements of uncertainty from the political and economic landscape in Scotland. Nevertheless, the narrow margin of the vote against independence and the resulting political fallout will have an impact for property occupiers, developers and investors. Although Scotland has always had an independent system of property law that will be unaffected by the vote, it is the ongoing political and economic implications that will be felt in Scotland and across the remainder of the United Kingdom. This briefings considers some of the likely outcomes.
Although Scotland will remain part of the United Kingdom with a single currency and part of the wider European Union, uncertainties remain. In the weeks before the referendum, the main political parties in Westminster fell over themselves in unseemly haste to offer greater devolved powers to the Scottish Assembly. The precise extent of those devolved powers has still to be revealed but it is clear that change is still coming to Scotland. The prospect of change and the unknown nature of the promised changes will create uncertainty and the one thing that the property market does not like is uncertainty!
In the short to medium term, the uncertainty in the property market could lead to a stagnation in property development and investment. Scotland will become a riskier and less attractive place to do business until the new political and economic landscape becomes much clearer.
Some analysts predicated that following a Yes vote, the value of properties in Scotland would have fallen in value in the region of 10% to 15% and that borrowing costs would increase. The No vote may mean that prices do not fall by quite so much but it is likely that some readjustment in property values will take place. Pension funds and other investors will want to analyse their exposure to the property market in Scotland. An average fund may hold 8% of its property assets in Scottish property. If they want to rebalance their portfolios, they may dispose of assets and reinvest in property outside Scotland.
Company pensions funds who invest in Scottish property or use their own property to support pension payments will need to monitor the situation closely so that they do not find themselves with and unexpected shortfall in the value of their pension assets that are required to cover their pension liabilities.
If there is a stagnation or a fall in value of Scottish properties, there may be opportunities for private equity funds to invest in “distressed” assets looking to make a return when buoyancy in the property market returns.
Before the referendum, a lot of comment was made about major Scottish banks and funds moving their registered offices to England. This would not have meant that all operations and staff would have moved south of the border. The main driver for relocation would have been to be subject to the regulation and control of the Bank of England and the No vote removes this reason for relocation. However, if tax raising powers are devolved to the Scottish Assembly and cost of business operations increases significantly in Scotland as a result of increases in rates and corporate taxation, then some migration of jobs may yet take place. This may be driven not only by business costs but also the rates of personal taxation and whether Scotland will be able to attract the necessary business talent to live and work in Scotland.
On the subject of relocation, if personal taxation rates increase for high net-worth individuals or taxes such as a mansion tax were introduced, then we could see such individuals moving into England to benefit from a more favourable tax regime.
There is also a potential opportunity for Scotland as well. In the same way that Ireland created a very favourable business environment to attract companies to Ireland, Scotland with devolved powers could seize the opportunity for economic development through dynamic policies to attract the best companies into Scotland.
The decision offer Scotland greater devolved powers may have wider implications for the remainder of the United Kingdom. Even before the vote, there were suggestions that other parts of the United Kingdom would look to receive greater devolved powers and autonomy from central Government control. The eagerness of the UK Government to offer the Scottish Assembly greater powers will strengthen the resolve of those who would like to see regions such as Cornwall or Greater Manchester having greater control over their affairs. It will be interesting to see how far those demands will be pushed over the coming months and years.
As can be seen, the result of the “No” vote will still lead to uncertainties and opportunities. The next two years should be interesting as the ramifications of the vote become clearer and the markets react to the new political realities that will emerge.