SCOTTISH RESIDENTIAL MARKET QUARTERLY

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1 SCOTTISH RESIDENTIAL MARKET QUARTERLY SPRING/SUMMER 214 In this issue... KEY FINDINGS 1 SALES MARKET Continuing Recovery 2 RURAL MARKET On the Up 6 NEW HOMES Recovery Imminent at Last 8 LAND, DEVELOPMENT AND RESIDENTIAL INVESTMENT Heating Up DEVELOPMENT & STRUCTURED FINANCE New Thinking Emerges 9 11 A MARKET RECOVERY WITH FIRM FOUNDATIONS? Much of the housing market is now in recovery mode after a difficult five-year period. The question is, how solid are the market foundations? In this issue, we examine how different parts of the Scottish housing market are performing and how confident we can be of the recovery being sustainable. LETTINGS Taking Off Again FARMS & ESTATES Quality Rules But Not Much Available As Scotland s leading independent property company, we work across the whole market, from Sales to Lettings, Property Management, New Homes, Farms & Estates, Land, Development, Valuation, Residential Investment, Structured Development Finance and Research & Consultancy. This joinedup, comprehensive service means that we have unrivalled access to market knowledge and information that provides Scottish-based research for the Scottish market. We also endeavour to tell people what they need to know rather than what they want to hear, with an honest and direct assessment of where the markets are at and likely to be heading.

2 MESSAGE FROM SIMON RETTIE Simon Rettie FRICS Managing Director 214 has seen the continued recovery in the property sector that started a year ago. The levels of transactions in Edinburgh, Glasgow and Aberdeen, in particular, continue to increase as buyers confidence returns and sellers can reasonably expect full value when placing properties on the market. There is a shortage of stock of most types, often leading to competition and, quite regularly, closing dates and premium offers. The country market still has some catching up to do and demand here lags that in the cities. However, it is normally a seasonal market and demand should improve as we enter the Summer months, the traditional time for listing country properties. The number of farms and estates on the open market is very restricted and not helped by the impending Independence Referendum and uncertain land reform issues. The Referendum is also having an impact on the higher end of the residential market ( 1.5 million plus), where the number of sales is very limited and only exceptional properties are transacting. There is possibly an over-supply at this end of the market and potential buyers, many from outwith Scotland, are waiting to see what happens after September 214. For the rest of the market, the Referendum is making little difference. There has been a marked increase in development opportunities, with more funding available and the knowledge that there is strong demand for houses when built-out. The new build developments we have sold recently have been selling quickly and at full price when there is little competition. The rental market remains buoyant, with, again, under-supply creating competition and driving rents upwards. Simon Rettie FRICS Managing Director simon.rettie@rettie.co.uk KEY FINDINGS FROM THIS QUARTERLY The start of 214 has seen the Scottish housing market build on its 213 recovery, with further increases in transactions and the value of property sold. Transactions in Scotland are up over one-fifth in the first three months of 214 compared with the same period last year. Average prices are now also beginning to increase at a faster pace as demand recovers. This recovery is being seen in rural as well as urban areas. For example, transactions were up 11% in the Scottish Borders in Q1 214 compared with Q However, the market is still some way off its previous peak, especially when values are adjusted for inflation. In Edinburgh, the market is only half of its peak 7 value in real terms. In Glasgow, it is only one-third of peak. Government stimulus packages are now improving access to mortgage finance, which is helping to increase demand for property, especially from first time buyers. In England, over 9% of homes bought under the equity loan part of Help to Buy were first time buyers and a similar profile is expected in Scotland. We expect transactions and prices to pick-up over the next five years due to economic recovery, improved lending and improved consumer sentiment. We anticipate average prices rising by nearly 3% and transactions by close to 6%. The new homes market had fallen to historically low levels in 213, but this is also now turning due to Help to Buy and the economic upturn. Completion levels in Edinburgh are up 1% in the last year. Quality product in well priced and located sites is thriving. The market for social housing has fallen back due to government austerity measures, although new measures are emerging to support new development by bringing funders and developers together in innovative ways. Residential land is now established again in prime locations and rippling out to secondary locations. Interest from institutions in the Private Rented Sector is a notable potential game changer in terms of providing new stock. All of the main Scottish cities are being closely considered for residential investment potential. There have been few actual deals as yet, but there are now a number in the pipeline. The rate of growth in the lettings market has increased again, despite the recovery in the sales market. Average rent levels are up nearly 4% in the last year across Scotland. In Aberdeen, rental growth continues to be considerable (nearly 11% in a year). There have been a limited number of quality farms and estates on the market in the last year. The east is continuing to outperform the west in farmland. There are significant market uncertainties here around CAP reform and Right to Buy. Scottish Residential Market Quarterly 1

3 THE SALES MARKET CONTINUING RECOVERY James Whitson Director, Edinburgh Sales The key message that can be taken from the latest official Registers of Scotland data is that the Scottish residential property market has continued to recover into early 214. All of the 32 local authorities in the country experienced an increase in transaction activity over the last year. The latest figures indicate that the initial turning point in the market, first seen in mid-213, is continuing to gather momentum. Overall, residential property transactions increased by 23% in Q1 214 (compared to the same period in 213). Figure 1 Monthly transaction levels in Scotland, Edinburgh, Glasgow and Aberdeen, 212, 213 and 214 Monthly Transaction Levels in Scotland in 212, 213 and early 214 Monthly Transaction Levels in Edinburgh in 212, 213 and early 214 1, 9, 8, 7, 6, 5, 4, 3, Monthly Transaction Levels in Glasgow City in 212, 213 and early 214 Monthly Transaction Levels in Aberdeen City in 212, 213 and early 214 1, 1, 1, Source: Rettie & Co. Figure 2 Monthly average nominal price in Scotland by month, 212, 213 and 214 Average Monthly Nominal Price in Scotland for 212, 213 and early , 167, 164, 161, 158, 155, 152, 149, 146, 143, 14, , 1, 1, , 1, 1, The national average price of residential property in Scotland for Q1 214 was up by 3.5% on the previous year. We can see from Figure 1, the uplift in national transactions that began to occur from early Summer 213, has also been witnessed in each of the main cities from this time and has continued. With further economic growth predicted and a less restrictive lending environment due to better economic conditions and government stimulus measures, this recovery in the market should be resilient, with it continuing to grow and moving us further away from the flat, seasonal market that we had experienced from 21. The impact to date on house prices has been modest, unlike other parts of the UK, such as London, which have been showing double digit growth in each of the last two years. Although prices have been relatively flat in recent years, prices in the second half of 213 were higher than the corresponding period in 212 and this has continued in 214. The seasonality of price changes is also clearly evidenced in Figure 2 climbing from March to Summer before dropping off. The higher price levels correspond with levels of peak demand in the market. The exception to this pattern of modest house price growth in Scotland has been Aberdeen, which has seen strong house price growth since 212 and 15% up on last year. The best barometer of housing market performance, however, is the value of property sold (or market turnover), which combines transaction levels and prices. Market turnover in Scotland during 213 was 18% higher than it was in 212. Turnover in the first three months of 214 was, on average, 27% higher than the first three months of 213. Source: Rettie & Co This increase in turnover has been seen in all of the major cities in the last two years. Scottish Residential Market Quarterly 2

4 Figure 3 Monthly turnover Levels in Scotland, Edinburgh, Glasgow and Aberdeen, 212, 213 and 214 Average Monthly Turnover in Scotland for 212, 213 and early 214 Average Monthly Turnover in Edinburgh for 212, 213 and early Average Monthly Turnover in Glasgow City for 212, 213 and early 214 Average Monthly Turnover in Aberdeen City for 212, 213 and early 214 x 1 million Source: Rettie & Co. Figure 4 Value of residential sales in selected Scottish cities in real terms, Q3 3, Q3 7 and Q3 213 Real Value of Residential Sales Key Cities (213 Prices) Millions x 1 million ,4 1, 31% 1, 51% 54% 8 65% % 25% City of Edinburgh Glasgow City Aberdeen City 3 Q3 7 Q3 213 Q3 Source: Rettie & Co analysis of Registers of Scotland data x 1 million x 1 million It is worth bearing in mind that although the market has improved, it is still way short of its previous levels. If we take account of inflation and examine the real value of property sold in Q3 of 3, 7 and 213 (the quarter when markets tend to peak), we can see the extent of the boom in sales over 3 to 7, but also how far the market has fallen back since (even with a recovery in 213). In Edinburgh, the housing market is half of what it was in real terms, and in Glasgow it is only one-third of its 7 level. Only in Aberdeen is the market up on its 3 level and even here (with 1% plus house price growth in the each of the last two years), the value of the market in real terms is still 25% down on 7. RETTIE & CO CORE MARKETS The market in Edinburgh is swinging back to a sellers market as sentiment strengthens month by month. Our market is particularly strong in the 5, to 75, range. We are also now selling two to three properties over 1 million each month, whereas we were averaging just one a month in the recession. High value townhouses over 1 million seem to be back in fashion. Properties on the market for in excess of 3 days are now attracting viewings. Where price reductions are implemented, these properties are gaining traction. Properties that were not attracting offers before Christmas are now selling for in excess of Home Report value. There is a lack of quality supply in the affluent parts of the city, which is driving house price growth. We recently sold a flat in EH9 at 3% over Home Report valuation after receiving nine offers over the Home Report value. This is the highest premium for a flat that we have achieved since the recession in EH9. It is not unusual now to see prime properties fetch 5% to 1% over valuation. At the top of the market, the Independence Referendum is becoming a concern, with a number of buyers and sellers adopting a wait and see policy until it is over. In East Lothian, since December 213, we have been instructed on nearly 1 million worth of 1 million plus house sales, including two agreed sales to overseas buyers, both from North America. In Perthshire, we have agreed the first 2 million plus sales at Gleneagles since 8 and we have also completed the sale of a small farm adjacent to Gleneagles Hotel for in excess of 1 million. All three buyers have been self-made Scottish businessmen. The Ryder Cup is not yet having an impact Scottish Residential Market Quarterly 3

5 on this market, as purchasers are mainly discretionary buyers living in the Central Belt or Aberdeen. Purchasers also tend to be Scottish-based, with only one of the 21 1 million plus sales undertaken by Rettie & Co at Gleneagles since 7 going to an overseas buyer. In general, the market in Glasgow and the West does not have the same momentum as in Edinburgh, but there are parts where recovery is strong. The market in the West End of Glasgow is at its highest level of activity since 8 and we are experiencing more demand and more activity at the top end of the market. This is partly being fuelled by an increase in lending but also by market sentiment. The Glasgow market is still very fragmented, but as transactions pick up in its core prime markets, it is only a matter of time until surrounding markets also recover more strongly. Our office in Bearsden has enjoyed a solid start to 214, after a strong 213. There has been the return of closing dates in the area, which is promising and shows that there is an increased appetite from home movers. The more rural markets within the G61, G62 and G63 areas are showing signs of life, but remain less favourable in terms of prices achieved and amount of time on the market compared with welllocated traditional properties in the main settlements. Providing properties are sensibly priced to attract a higher level of interest, we are finding that they are selling at or slightly above Home Report valuation. As has been the case in Bearsden in the recent past, demand is outstripping supply, with very few quality properties coming on to market, although this is now beginning to pick-up. The Rettie and Co. office in Berwick and Northumberland continues to see positive signs of an overall improvement in this market, with significantly improved transaction numbers from 12 months earlier. There is evidence of people migrating to areas either side of the border, where they are able to find fine houses at prices that are significantly lower than where they have come from. With money still tight and finance still restricted, it would seem some buyers are prepared to travel further to match their requirements with their finances. The market in the Scottish Borders tends to lag urban areas of Central Scotland, in both recovery and recession, although the evidence is now clear that transactional increases in the cities have begun to ripple out into this region. In the official housing market data, the number of residential sales in the Borders was up 23% in 213 compared with 212 (taking account of the years as a whole). Increased activity is particularly noticeable in the Border hotspots of Melrose, Kelso and Peebles. Closing dates have selectively returned, and Home Report valuations are occasionally exceeded in these towns, where an early sale is secured. We have been working with a number of developers and investors in the Aberdeen market, which has shown strong growth in recent years in house prices and rent levels. The main driver in the Aberdeen market comes largely from the booming oil & gas sector. There has been a longstanding shortage of homes in the city, although this is now being tackled with a less restrictive planning system and greater developer appetite. GOVERNMENT STIMULUS PACKAGES We have previously reported on a number of Government backed initiatives that have stimulated the sales market and should boost it further over the short to medium term. We provide an update on these below. The UK Government s and Bank of England s 8 billion Funding for Lending Scheme (FLS) has helped the mortgage market. Under this Scheme, cheap loans are made available to financial institutions provided that they go to households and businesses. However, The Bank of England has announced that this Scheme is being withdrawn for mortgage lending. This may put some upward pressure on mortgage rates, but it is important to remember that FLS is estimated to have accounted for only around 5% of total mortgage lending in 213. The Help to Buy scheme is now fully operational across the UK. There are two elements to the scheme - a shared equity scheme that operates differently in England and Scotland (see below) and a guarantee to lenders for loan to value mortgages of up to 95% for both new build and secondary sales on properties priced up to 6,. The second phase of the Help to Buy scheme, launched in the UK in October 213, has created nearly 1 billion of mortgage lending in the first three months, with 75 completed sales and 6, people putting in offers and applying for mortgages. 8% of Help to Buy mortgage applicants have been first-time buyers. The scheme has been successful in increasing demand, particularly at market entry level, but, without a supply response to the demand stimulus, it may serve to boost house prices with consequent affordability issues. The Scottish Government announced its shared equity scheme designed to help home buyers in Autumn 213. Under this scheme, the Government provides the cash over the next three years to help both first-time buyers and existing homeowners looking to buy a new build property. Those who successfully apply to the scheme will buy the majority share of a new build property, with the Scottish Government buying the rest. When the property is sold on, the Government then receives a cash sum proportionate to its share. Unlike Help to Buy in England, the Scottish version will not charge buyers a fee of 1.75% for using the scheme. As with the wider Help to Buy programme, the scheme looks very likely to boost demand with the impact on supply less certain. THE MORTGAGE MARKET The final quarter of 213 marked the highest number of mortgage loans advanced in Scotland since Q2 8. During 213, a total of 54, mortgages were advanced at a value of 6,5 million, 19% up in terms of value on 212. Much of the increase has been driven by the first time buyer (FTB) market - there were 6,7 loans advanced to these buyers in the final quarter of 213, which is an increase of 26% on last year, the largest number advanced in one quarter since Q4 7. It is encouraging that lending is now increasing at a greater pace, but current levels are still around half the level they were pre-recession and still well down on what would be considered to be market norms. The introduction of the Mortgage Market Review (MMR) from April 214 may tighten lending as banks need to account for people s spending, as well as their income, and better stress test mortgage applications. There are already signs that the number of mortgage approvals is beginning to drop back. This could limit growth in transactions and house prices, counteracting some of the effects of Help to Buy, although mortgage lending should still continue to grow as the economy recovers, interest rates remain low and the banks compete for mortgage customers. Scottish Residential Market Quarterly 4

6 Figure 5 Mortgage advances in Scotland, 6-13 Number of Mortgage Advances in Scotland, Q4 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, FTBs Home Movers Source: The Council of Mortgage Lenders Table 1 Rettie & Co house price forecasts for Scotland, Scotland Annual House Price Growth Central Downside 213 (actual) % 3.9% 5.3% 5.% 1.4% 3.% 4.% 3.8% Upside 1.4% 4.8% 6.3% 6.5% RETTIE & CO FORECASTS Our previous market forecasts have been relatively accurate in recent years. We correctly identified back in 8 that the correction in an overheated market would be based on falling sales rather than prices and we also accurately predicted the largely flat market in prices and transaction levels we had from We expected 213 to witness a stronger market recovery, which occurred, although the scale of the recovery in transactions was greater than anticipated. Our forecasts for price and transaction rises are included below. We believe that prices will rise by around 29% in the next 5 years, with transaction numbers up by around 6% on 212 figures. Improved economic performance is a major reason underpinning our growth projections. The continuance of Government stimulus packages, especially Help to Buy, should see further rises in transaction levels and prices from 214, as it enables more potential purchasers to buy and prices should rise to meet the increased levels of debt available. However, lending is still expected to be restrictive given bank attitudes to risk and regulatory requirements. Therefore, we anticipate that the rise in prices will not be approaching the annual double digit growth seen in the last boom % 4.5% 7.5% % 4.5% 7.5% Total Growth % 21.4% 37.1% Source: Rettie & Co. Research Table 2 Rettie & Co house transactions (sales volume) forecasts for Scotland, Scotland Annual Transactions Growth Central Downside Upside 213 (actual) 84, 84, 84, ,4 97,9 89, , 19, 97, ,5 115, 15, , 121,5 114,4 Total Growth % 44.4% 73.% Source: Rettie & Co. Research As well as a most likely (central scenario), we also produce more optimistic and pessimistic forecasts, which, sensibly, gives a range of possible movement in the overall market, dependent largely on future economic conditions. It is important to bear in mind that even with these levels of growth in transactions, the market would still have over 2, less transactions in 218 than it had in 7. Due to the relatively high levels of inflation, it should be noted that the growth that we predict in nominal prices will be eroded to some degree by the rate of inflation. It may be to around 217 or 218 before house prices are back to what they were in real terms in 7. We are now seeing a clear swing back to a sellers market in Edinburgh. Many properties that had been on the market for a long time are now selling, some at over Home Report valuation. Improving market sentiment has brought more demand into the market, but there is till a clear shortage of supply James Whitson Director, Edinburgh Sales james.whitson@rettie.co.uk Scottish Residential Market Quarterly 5

7 RURAL MARKETS ON THE UP Andrew Smith Director, Country House Sales The news from our rural offices is also promising. Both our Melrose and Berwick offices have reported a marked pick-up in activity across the market. The country homes market has continued to improve as the number of closing dates increases and sales through the year have been attaining closer to Home Report valuation. There has been a continued improvement to the number of applicants and transactions in most rural areas since mid-213. The market is still showing signs of regional variations with areas like Perthshire and East Lothian outperforming areas such as West Lothian in recent years, although the West Lothian market is enjoyed a better 213. The positive ripples from Edinburgh and the stronger parts of Glasgow have started to reach outwards towards the commutable towns. Properties further than 25 miles from the city centres attract significantly fewer viewers. Prices have remained broadly static, albeit with good quality property continuing to rise to the top, while any property that is deemed as secondary by potential purchasers is viewed more critically. We have seen an increase in the number of genuine buyers with more than 1 million to invest in a country property. Many of these buyers either already live here or have Scottish roots and are returning to the country having worked abroad. A significant proportion of overseas buyers are returning for schooling purposes. The Ryder Cup, being held at Gleneagles in 214, has increased the level of enquiries in the Auchterarder area. There may be a stalling in the country house market in the immediate lead up to the Independence Referendum in September due to market uncertainty. However, it is likely that there will be a return to usual trading patterns after this point. THE LOTHIANS The market in the Lothians has generally followed the wider market trend, with a substantial pick-up in transactions and market turnover. Transactions were up by 3% in East Lothian, 31% in Midlothian and 51% in West Lothian comparing Q1 214 to the same period in 213. Figure 6 Index of Transactions in Scotland, East Lothian, Midlothian and West Lothian, Q1 Index (7 Q1=) Index (7 Q1=) , 235, 22, 25, 19, 175, 16, 145, 13, 115,, Scotland East Lothian Midlothian West Lothian Average Prices in Scotland, East Lothian, Midlothian and West Lothian, Q1 Scotland East Lothian Midlothian West Lothian Index of Market Turnover in Scotland, East Lothian, Midlothian and West Lothian, Q1 Scotland East Lothian Midlothian West Lothian Source: Rettie & Co. Research, adaption of Registers of Scotland data Summary Volume of housing transactions, average prices and market turnover indices in Scotland, East Lothian, Midlothian and West Lothian, 7-13 Midlothian has shown signs of recovery as turnover and transactions were are up 12% and 31% respectively in Q1 214 compared to Q However, average prices were down 14% on Q1 213 levels. West Lothian has had a more staggered recovery up to 213. However, in Q1 214, average prices, transactions and turnover all increased by 1%, 51% and 52% respectively, compared to Q Prices in East Lothian increased by 6% in Q1 214 compared to Q1 213, while transactions and market value were up by 3% and 37% respectively. Scottish Residential Market Quarterly 6

8 CENTRAL SCOTLAND AND THE SCOTTISH BORDERS The market in Central Scotland and the Scottish Borders is also now firmly on the rise. Average prices in Perth & Kinross were 1% up in Q1 214 compared to the previous year, while the value of property transacted and the number of properties sold both increasing by 38% and 25% respectively. The picture in the Stirling market is similar in Q1 214 transactions were up 35% and market turnover was up 3%. The average price in Stirling actually fell by 4% when comparing Q1 214 to the previous year. Figure 7 Volume of housing transactions, average prices and market turnover indices in Scotland, Perth & Kinross, Scottish Borders and Stirling, 7-13 Q4 Index of Transactions in Scotland, Perth & Kinross, Scottish Borders and Stirling, Q1 Index (7 Q1=) The Scottish Borders is also showing a market recovery. Average prices increased 8% in Q1 214 compared to Q1 213 and transactions and turnover were up by 11% and 19% respectively. Price stability seems to be a feature here in enabling market recovery. WHAT OUR MARKET PROFESSIONALS SAY In the Borders, increased activity is particularly noticeable in the hotspots of Melrose, Kelso and Peebles. Closing dates have selectively returned and Home Report valuations are occasionally exceeded in these towns. Tony Perriam MRICS Managing Partner, Borders Office tony.perriam@rettie.co.uk We continue to see positive signs of overall improvement in the Berwickshire and Northumberland market, with significantly improved transaction numbers from the sale period 12 months earlier. With money still tight and finance restricted, buyers have been prepared to travel further to match their requirements to their finances, which has been a major factor in this improving market. Rob Taylor Managing Partner, Berwick-Upon-Tweed Office rob.taylor@rettie.co.uk Transactional volumes in the rural counties of the central of Scotland are increasing, although not at the same pace as parts of Edinburgh and Glasgow. Many now perceive the likes of East Lothian, parts of Fife, parts of Stirlingshire and parts of Dunbartonshire as good value compared with the prime parts of our major cities. Growth in market values should return to prime locations outwith Edinburgh and Glasgow within central Scotland in the next 6 to 18 months, with the likes of Bridge of Allan, Dollar, Linlithgow, Gleneagles, Killearn, Kippen and other desirable residential locations being the first to benefit. Andrew Smith Director, Country House Sales andrew.smith@rettie.co.uk Scotland Perth & Kinross Scottish Borders Stirling Average Prices in Scotland, Perth & Kinross, Scottish Borders and Stirling, Q1 245, 23, 215,, 185, 17, 155, 14, 125, 11, 95, 8, Index of Market Turnover in Scotland, Perth & Kinross, Scottish Borders and Stirling, Q1 Index (7 Q1=) Scotland Perth & Kinross Scottish Borders Stirling Source: Rettie & Co. Research, adaption of Registers of Scotland data Summary Scotland Perth & Kinross Scottish Borders Stirling Average prices in Perth & Kinross in the first quarter of 214 increased 1% on Q The value of property transacted was up 38% and the number of properties sold was up by 25%. Activity in the Stirling market shows a similar pattern average prices in Q1 214 were down 4%, transactions are up 35% and market turnover is up 3%. The Scottish Borders is also showing market recovery as average prices increased 8% in Q1 214 compared to the previous year. Transactions picked-up by 11% and market turnover rose 19%. Scottish Residential Market Quarterly 7

9 THE NEW HOMES MARKET RECOVERY IMMINENT AT LAST Calum Miller Sales & Marketing Manager The Scottish new build market is still declining, but the rate of slowdown has eased and some areas of the country are now seeing growth in new build activity, notably the Scottish Borders, where completions are up over 8% in a year. Help to Buy has increased demand for new build property and there is evidence, with the 21% rise in UK new home registrations, that there has been as supply response 1. New build activity levels should therefore improve over 214 and beyond. Considering the last quarter of available data, starts are down 3% across the country and completions down by 7%. Although still declining, this is the lowest year-on-year percentage decrease in start levels since 6-7. New build start levels are growing in Edinburgh (up 38%), Glasgow (up 17%) and Perth & Kinross (up 51%). Completions levels are up notably in Edinburgh (1%), the Scottish Borders (81%) and West Lothian (34%). A recovering sales market has re-stimulated activity in the new build market and development pipeline in many parts of the country. However, the recovery is patchy. In some areas, completions are falling considerably, notably Midlothian (down 28%), East Lothian (down 3%) and Glasgow (down 44%). In fact, Scotland s largest city has really struggled to build new houses since the recession and is way behind the national average, as Figure 8 demonstrates. Despite this gloomy picture from the most recent official data, our own more up-to-date data shows that the sales of new homes are continuing to perform well in key sites where we are selling, partly due to Help to Buy. People are committing to purchase in circumstances where they did not before and, on most of the major sites where we have been involved, we are seeing an increasing number of reservations and people purchasing off-plan. There remains a shortage of new home stock and this is likely to be the case for some time yet, as the new build market tends to lag trends in the wider economy. As a result, we anticipate this demand for new build outstripping supply over the next year at least, which will likely bring rises in new build prices. Figure 8 All sector new build starts and completions indices (=) -212/13 (4 quarter period ending Q3 213) Index of All Sector New Build Starts in Scotland, The City of Edinburgh and Glasgow City (=) Index of All Sector New Build Starts in Scotland, East Lothian, Midlothian and West Lothian (=) Scotland City of Edinburgh Glasgow City Index of All Sector New Build Starts in Scotland, Perth & Kinross, The Scottish Borders and Stirling (=) Scotland East Lothian Midlothian West Lothian Index of All Sector New Build Completions in Scotland, The City of Edinburgh and Glasgow City (=) Scotland City of Edinburgh Glasgow City Index of All Sector New Build Completions in Scotland, East Lothian, Midlothian and West Lothian (=) Scotland East Lothian Midlothian West Lothian Index of All Sector New Build Completions in Scotland, Perth & Kinross, The Scottish Borders and Stirling (=) This is already being seen in developments such as Burdiehouse in Edinburgh (Barratt Homes), where prices for detached family homes have sold for more than expected by many in the market, at around 225 per sq ft. Developers are beginning now to target this market. People who had been saving for a 2-bed flat now have the ability with Help to Buy to stretch that little bit further. If prices can be kept below the 25, Stamp Duty threshold, this is attracting strong demand for city product, pushing prices a bit higher as a consequence. However, the corollary of this is that the prices of new build flats have not increased by as much as had been expected. 214 has seen a very strong first quarter for new homes, with increased confidence in the marketplace from buyers and developers alike. Help to Buy has undoubtedly pushed sales up. Rettie & Co has maintained its position as the largest dedicated new homes sales and marketing team in the country, with a number of exciting new projects coming forward, including Woodcroft in Morningside, Edinburgh. Calum Miller Sales & Marketing Manager calum.miller@rettie.co.uk 1 Source: National House Building Council (NHBC) Source: Registers Scotland of Scotland Perth & Kinross Scottish Borders Stirling Scotland Perth & Kinross Scottish Borders Stirling Scottish Residential Market Quarterly 8

10 LAND, DEVELOPMENT & RESIDENTIAL INVESTMENT HEATING UP Will Scarlett Director, Land, Development & Residential Investment The recovery in land values continues unabated and is now rippling out from the now well established recovery in prime housing land in and around Aberdeen, Edinburgh and Glasgow to less central locations. As an example of this, Rettie & Co. recently sold 32 acres of zoned land at the Liff Hospital site in Dundee (see image below). This land failed to sell throughout the recession. Rettie & Co. were retained to launch a fresh marketing campaign that closed in December 213 and received high levels of interest from house builders. PLC house builders continue to bid aggressively for their preferred sites oven-ready and in good commutable locations. The rate of sales remains critical, therefore tertiary locations remain out of favour and effectively unsellable. This should change in time, assuming that the recovery continues. For the first time in many years, we have been witnessing strong demand from house builders for flatted schemes. In Edinburgh the rapidity of the recovery in the development market is well illustrated by the 213 consent on Shrub Place for low cost colonies style units. While this type of unit is selling successfully elsewhere, the rise of interest in private rented sector in the last six months and the recovery of the flatted market, means that best value for the site can now be obtained from a high density flatted scheme, as was the case prior to 8. Rettie & Co. are acting for the buyer. Good development sites are in short supply and the number of funded developer buyers is steadily growing. The result is continued price growth for prime development sites in strong locations. Figure 9 Proportion of households in the PRS in Scotland and its major cities, -12 Growth in Proportion of households in Private Rented Sector (PRS) Accommodation 3% 25% 2% 15% 1% 5% % Aberdeen Edinburgh Glasgow Scotland Source: Scottish Household Survey Rettie & Co. recently sold 32 acres of zoned land at the Liff Hospital site in Dundee Commercial townhouses, for conversion to residential use, are in short supply in Edinburgh and Glasgow and in strong demand once more, although values have not yet returned to their pre-crash peak. Owner occupiers are the keenest bidders for individual townhouses, but the number of buyers for townhouse blocks is restricted due to the specialist nature of conversion. In the Scottish market, there is a great deal of talk about the Private Rented Sector (PRS), a good deal of attempted activity, but very little to show for it to date. There is a growing feeling that the London property market is overheated and this is encouraging funds to consider other regional locations in their search for yield. Rettie & Co recently held a number of seminars on the Scottish property market for investors in Singapore and Hong Kong, which had a high level of interest (over 16 attended 3 events) from small and large scale investors. UK-wide, a number of institutional funds have entered the PRS sector, including L&G, M&G (PRUPIM), APG/ Grainger (GRIP) and SWIP. Others, such as Aberdeen Asset Management, have declared their intention to enter the market. These join PRS specialists including Patrizia, Atlas Residential and Sigma/Gatehouse Bank, to name but a few. In Scotland there has been little activity to date largely due to the Scottish Residential Market Quarterly 9

11 lack of available large scale stock or opportunities. Hearthstone Investments acquired a residential block from Miller Homes in June 213. Rettie & Co. have recently sold a site for approximately units in Edinburgh to a PRS developer/operator, and a trading residential investment of 35 rented units in Glasgow. We are advising on large sites in Edinburgh with PRS potential, including Caltongate (148 units) (see image below), which will be available on a turnkey basis as part of a larger UKwide PRS portfolio; Salamander Place in Leith, consented for 585 private units; and St. James s Centres, 175 units. Despite the uncertainties that the Independence Referendum presents, Edinburgh appears to be high on the list of regional cities targeted by investors 6.5% 6.% 26,884 as it has strong market fundamentals that sustain demand in the PRS. The graph below highlights the growth in the sector, which now accounts for 27% of Edinburgh households. Glasgow and Aberdeen are now also emerging as residential markets for institutional funds seeking to diversify their portfolios and take advantage of the strong demand drivers yet relatively weak supply. The chart below highlights the average mix-adjusted gross yields available in each of Scotland s main cities based on average rental figures and average house prices. It also shows the percentage that each market is still below peak in real terms. This is only for illustrative purposes as there are many Figure 1 Current property prices, average gross yields and percentage below peak prices in real terms Current Property Prices, Average Gross Yield and Percentage Below Peak Prices in Real Terms Prices in Real Terms 128,231 micro markets operating in these cities. In real terms, house prices remain well down on pre-recession levels in all of Scotland s main cities. In Glasgow, prices remain 3% down, with Aberdeen recovering fastest. Gross rental yields have been consistently higher in Aberdeen, with rents growing even faster than house prices. In Edinburgh, gross rental yields have been growing steadily since 8 as prices remain relatively flat but average rents grow. In Glasgow, average house prices have fallen while average rents increase, seeing gross rental yields now rise to close to Aberdeen levels. Dundee is around the Scottish average for yields, but with relatively low entry prices. It will take time for the private residential market to become commoditised in the same way that the student housing market has now become a regular and accepted means of institutional investment, but this now looks likely to happen given the demand and supply imbalances in the market and the opportunity for good and regular returns. Average Gross Rental Yield 5.5% 159,67 127,565 5.% 4.5% 214,475 4.% 3.5% 3.% % 5% 1% 15% 2% 25% 3% 35% Percentage Below Peak Prices in Real Terms (7 Q3) City of Edinburgh Glasgow City Aberdeen City Dundee City All Scotland Source: Rettie & Co analysis of data from Registers of Scotland and Citylets Rettie & Co. are advising on large sites in Edinburgh with PRS potential, including Caltongate (148 units) The student housing market in Aberdeen, Glasgow and Edinburgh remains active, but with an overwhelming preference from developer operators for prime sites in close proximity to the better universities. Rettie & Co have approximately 1,3 student beds under offer in Edinburgh (sold or acquired) and recently acquired a site in Aberdeen for 12, sq ft. There is a growing price differential between per bed values for prime versus secondary locations. The market recovery for development sites is encouraging and perhaps rippling out faster than anticipated. Opportunities remain to acquire secondary and tertiary sites that are out of favour given the need to achieve a benchmark rate of sales. The Private Rented Sector is hot, but, in Scotland, the market will be restricted by a lack of large-scale sites that the major funds require, which will leave many parties frustrated. We anticipate a slowdown in activity over the Summer months, which some will see as an opportunity, assuming that the market continues to recover after the Referendum. Will Scarlett Director, Land, Development & Residential Investment will.scarlett@rettie.co.uk Scottish Residential Market Quarterly 1

12 DEVELOPMENT FINANCE NEW THINKING EMERGES Mica Giles Consultant, Development & Finance We are still seeing lethargy in the institutional investor market. While the market is still professing investment interest, deal flow has not materialised. We believe that one solution lies in the careful management of existing assets into a suitable portfolio capable of meeting investor needs. This is being evidenced by an increase in consolidation in the asset management market. Rising house prices and a low level of repossessions has meant that institutional investors have been unable to purchase large portfolios of residential property. Instead, investors are often forced to buy individual properties, which makes investing in residential property a more expensive and time-consuming exercise. On the funding side, we are seeing a slow relaxation of development funding by the larger players in the market. Typical loan to values (LTVs) range from 5% to 65% of cost, with an all-in funding cost of around 6% to 8%. We suggest that our clients devote some time to not only presenting their developments on a discounted cashflow basis, but also ensure that their credentials and experience are available to provide Figure 11 New build starts and completions (social and private) (4Q period ending Q3) Index of Scottish New Build Starts by Sector Index of Scottish New Build Completions by Sector Source: Scottish Government All Starts Private Starts Social Starts All Completions Private Completions Social Completions funders with as complete a picture as possible. There has been some movement in the appetite for international real estate finance in the UK, with the costs of funds being particularly competitive, even compared to UK gilt rates. Deal size is a limiting factor, but given the attractiveness of the cost of funds, we see this forming an ever larger part of UK real estate finance. AFFORDABLE HOUSING There is still appetite to provide National Housing Trust (NHT) support to the affordable housing sector, but rising land values and some concern at the local authority level about interest rate exposure is dampening opportunity and appetite. Registered Social Landlords (RSLs) are still being constrained by the funding available to them from their existing lenders, for both new lending and existing loan covenants. We believe that a sensible discussion should be had between the RSL and its funder to demonstrate alternative ways in which the lender can extract value and relax its terms. There is continued opportunity for long term finance in this sector, but sovereign guarantees are still required. The Department for Communities and Local Government (DCLG) are still promoting their funding guarantee, but uptake in Scotland has been slow. Their PRS offering is yet to be delivered in substance. These funding constraints have impacted on output. After picking-up strongly after the recession in 8, the number of social homes completed has dropped away considerably since 9 as a result of government austerity measures. New initiatives are continuing to emerge to aid the delivery of affordable housing in an environment of constrained housing grant. There have been some welcome announcements recently regarding Scottish Residential Market Quarterly 11

13 increases to grant levels, but this still falls some way short of enabling supply to meet the required demand, as evidenced by the burgeoning housing waiting list across the country, now estimated to be around, in Scotland, comparable to the population of Aberdeen. The Rettie & Co. Structured Finance Team has been busy delivering a wide variety of services to not only landowners and developers, but also funds, housing associations, councils and non-government organisations. The team is particularly busy delivering a number of National Housing Trust (NHT) solutions, effectively providing affordable finance for challenging sites. We have successfully delivered one of the pathfinder NHT transactions and are at various stages of delivering a number of others. Figure 12 Bank of England Official Interest Rate from 1694 Source: Bank of England Using the strength and breadth of experience of our Research Team, we are providing advice to a number of public sector bodies, supporting them in the delivery of their development and business plans. Diligent forecasting is key to both risk management and governance requirements. We are making excellent use of the historically low rates of debt, arranging development and refinancing solutions for our Clients. In addition, we are pushing the boundaries of loan to value thresholds, and funding costs through careful and contemporary risk management. Finally, the Rettie & Co Team are using their unique skill sets to support a Scottish local authority in an asset management feasibility review. Our access to prospective purchasers outside the traditional housing market is providing real value. Structured Finance can bring solutions for new housing. We work closely with many of the active funders in the Scottish market through to international debt and equity investment in the housing market. We have now teamed up with a number of partners to deliver whole life solutions to complex regeneration and infrastructure projects. Mica Giles Consultant, Development & Finance mica.giles@rettie.co.uk Scottish Residential Market Quarterly 12

14 LETTINGS TAKING OFF AGAIN Diarmid Mackenzie Smith MRICS Director, Letting & Management We continue to witness strong levels of activity in the rental market despite an improving sales market. The rate of growth in rental levels began to fall last year, but the most recent market statistics suggest that rental growth has again picked-up, up 3.6% nationally in Q1 214 compared with the same period the year previously. This growth is seen in Scotland s main cities Aberdeen (up 1.9%), Edinburgh (up 3.8%) and Glasgow (up 2.4%). Time-to-let (TTL) has fallen in Edinburgh and Glasgow, but not in Aberdeen, where the decline in TTL has eventually halted. However, property still lets fastest in Aberdeen a 2-bed property on average takes just 2 days to let compared with over 3 in Edinburgh and Glasgow. TTL has fallen fastest in Glasgow, now down at 32 days on average and close to the Edinburgh average of 28 days. Since January, the rural rental market has seen a huge flurry of activity. Good quality stock across the board is seeing marginal increased advertising rents, with viewings swiftly turning into lets. Tenants are willing to commit to signing 12-month leases for surety. Landlords of large traditional properties are aware of the running costs and condition and the asking rents now reflect this. The same rule applies to the rural cottages. In time, both will let, but this market can be slow. The new initiative of mid-market rents has seen a huge demand from tenants. This is notable at a current development we are agents on in Dumfries, which has a selection of 54 3-bedroom houses and 16 2-bedroom flats that are being built in phases during the course of the year. The aim is to secure tenants as soon as possible on completion of each phase. 16 units have been let within the required timescales since the end of February. Once the tenant is secured, they can join a savings scheme to purchase the property after 5 years. OUTLOOK Demand in the rental market continues to outstrip supply causing rents to continue to rise. 214 has again shown that, despite an improving sales market, rental growth has returned. Given the continued problems of accessing mortgage finance, the shortage of new build and people s need for more flexible tenure, the rental market will probably continue to rise over the next few years at least. Rising rents present an opportunity for developers and institutional investors to benefit from reliable returns. Opinions towards renting appear to be changing. It is now being recognised for its merits such as the flexibility it offers, the freedom granted by not having a mortgage and the fact tenants don t need to worry about repairs or maintenance. The growth of the PRS over the past 1 years is likely to continue as there are a group of renters who are unwilling or unable to buy. Diarmid Mackenzie Smith MRICS Director, Letting & Management diarmid.mackenziesmith@rettie.co.uk Figure 13 Average rental levels in Scotland and its main cities, Average Monthly Rent in Scotland, Aberdeen City, City of Edinburgh and Glasgow City 1, 1, Scotland Aberdeen City City of Edinburgh Glasgow City Source: Citylets Scottish Residential Market Quarterly 13

15 FARMS & ESTATES QUALITY RULES BUT NOT MUCH AVAILABLE Chris Hall MRICS Director, Farms & Estates We have deliberately used the same headline in this Quarterly as we did in the previous one, as little has changed. There are still only a limited number of good quality farms and estates on the market over the last year and a quarter. Prime farms and estates continue to be sought after while secondary properties are not so easy to sell unless realistically priced. Recently, details of reform to the Common Agricultural Policy (CAP) have emerged and, as they begin to be implemented, these undoubtedly will impact greatest on the suckler cow and sheep sectors rather than the arable and vegetable sectors. The growing divide between east and west Scotland in land values and demand is therefore likely to persist in the years to come and only time will tell whether the proposed reduction in subsidies for the livestock sector will increase the number of farms coming to the market. This may well happen, but probably not until 215. There are often blurred lines between what some agents label as estate when it might be more realistically called farm. In 213, we estimate that around 4, acres of farmland was publically Median Value ( /Acre) of Arable and Pasture Land in Scotland /Acre advertised for sale, including one estate of about 4, acres that comprised a series of farms. This supply composed about 15 different farms and blocks of farmland. As with previous years, stock rearing and mixed farms dominated supply. Around 1 commercial arable units were advertised and, as in previous years, demand remains strongest for good quality commercial arable land in eastern counties. Arable land values now range between about 5, and 15, per acre, depending on quality and location. Undoubtedly, the greatest demand and highest prices are being paid in Angus. Hill grazings remain in demand from forestry companies for planting purposes and demand for stock rearing and dairy farms frequently depend on the wealth of the farmers in the immediate district. There has been a continuing trend for off-market private sales in the last year. As an example, Rettie & Co sourced and subsequently advised Hamilton & Kinneil Estates on their purchase of Dirleton Newmains Farm in East Lothian. Among other private off-market transactions were the sale of Sunnyside Farmlands in East Lothian, the Grassmiston Farmlands Figure 14 Median value ( per acre) of arable and pasture land in Scotland, , 5,5 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 4 H1 4 H2 5 H1 Source: RICS Land Market Survey 5 H2 6 H1 6 H2 Scottish Residential Market Quarterly 7 H1 7 H2 Scotland Arable ( /acre) 8 H1 8 H2 9 H1 9 H2 Scotland Pasture ( /acre) 21 H1 21 H2 211 H1 211 H2 212 H1 212 H2 by Crail in Fife and Whitehills Farm by Gleneagles Hotel. Successful and progressive farmers are keen to expand their operations and demand from outwith the farming sector remains ongoing. This is often fuelled by tax advantages, although, as yet, Scotland has not seen the scale of investment that James Dyson has made in Lincolnshire, where he has spent in the region of million on farmland acquisition in the last two to three years. The prospect of an Absolute Right to Buy has surfaced for tenant farmers and the discord between the agricultural landlord and tenant sectors is widely publicised in the Scottish agricultural press on a weekly basis. The Land Reform Group s recommendations on Absolute Right to Buy will become known as the year progresses. If Absolute Right to Buy, rather than Pre-emptive Right to Buy, is introduced then it will create waves in the Scottish countryside and its farmland marketplace. In the last year, in capital value transaction terms, the estate market is dominated by one sale at around 2 million. Stripping out this transaction, the capital value of the estates sold in the open market was limited, albeit there remains strong demand from both domestic and international buyers for trophy estates of distinct and immediately recognisable quality. The farmland market remains generally strong, although the depth of the market is much greater in the east of Scotland. The uncertainties of CAP reform and reduced subsidies for the livestock sector, allied to the possibility of the Absolute Right to Buy for 1991 Agricultural Holdings Act secure tenants may well have an impact on the farmland marketplace, but this is only likely from 215 onwards. Chris Hall MRICS Director, Farms & Estates chris.hall@rettie.co.uk 14

16 ABOUT RETTIE & CO RESEARCH Dr John Boyle This Market Quarterly has been prepared by our Research Team, the largest dedicated residential research team in Scotland. The Team can help you to understand and make the right decisions on what is happening and likely to happen in housing markets. We offer advice that is robust, objective and based on not just analysis of these markets, but through engagement with our other teams who work in these markets on a daily basis. WE OFFER: Grant Davidson grant.davidson@rettie.co.uk Information and advice on national, regional and local housing markets including prices and sales by property types, and rent levels Analysis of key market drivers, including economic conditions, and demand and supply indicators Benchmarking (including by price, sales, rates, product mix, incentives and specifications) through our custom designed in-house Property Tracking System (PTS) Assessing current availability, takeup, occupancy, stock and pipeline developments Housing market forecasting on national, regional and local markets, including prices, sales, values, rents (housing and land) by property types and locations Forecasting key market drivers, including economic conditions, demography and other demand and supply indicators, and assessing the impacts of these Advising on future housing strategies and targets, based on our assessments of likely future market and economic conditions Inputting into new housing developments and masterplans, with advice on how these should be market led, as well as on product type, mix, pricing and phasing Devising affordable housing solutions for future UK housing provision - Our Resonance model involves close private/public sector co-operation to advance the delivery of affordable housing through a flexible and relatively straightforward structure As well as housing, we can also offer similar analysis and advice on other property types, including office, industrial and retail. Combined, these services can provide you with a clear understanding of the housing market in which you are interested and the overarching economic situation to enable you to make robust, evidence-based decisions. Niall Lochhead niall.lochhead@rettie.co.uk For further information, please contact: research@rettie.co.uk Scottish Residential Market Quarterly 15