The Scottish referendum: A relief for the markets?

09 October 2014

The Nae vote: A relief for the markets?

The property market has not been immune to the potential issues raised by the recent Scottish Referendum and now that it has happily been concluded we thought it worth reflecting on the likely consequences of the decision to stay in the Union.

Now that the uncertainty has been removed from the markets, we expect the risk premium associated with investing in Scottish property to narrow. Up to now, the commercial markets in Scotland have not enjoyed the same degree of re-rate as the major cities in England, with the arbitrage between the two being in the order of 50 to 75bps (depending on the type of property).

However, whilst we believe that there a re-rate will occur, until such time as investors get comfortable with the new status quo it is likely that the current discount will not erode entirely; perhaps providing an opportunity for the bold investor?

From the occupiers point of view we anticipate an improvement in demand for commercial floor space due to occupational requirements having previously been put on hold, pending the outcome of the vote. Consequently we expect quite a sharp improvement in the take up in all of the major Scottish markets.

On the flip side, the yes vote has also reduced the likelihood of an exodus of Scottish based companies, particularly those in financial services which, in a worst case scenario, could have led to a glut of empty office space.
St George and the dragon.

The English and Welsh markets have not been insulated from the uncertainty. A yes vote for independence raised the probability of a run on the pound generated by the uncertainty that would have surrounded the terms of the settlement with Scotland and how this would affect the UK’s debt burden and ability to finance it.

In these circumstances the Bank of England would have come under pressure to raise interest rates; but would have done so to protect the value of sterling rather than to temper the inflation rate.

A pro-independence vote would also have raised the risk from investing in UK government bonds, inevitably resulting in an outward movement of the yield in order to retain their appeal to investors.

The impact of this would have been to increase the discount rate of all UK investment assets including property. The no vote has therefore removed key risks relating to the cost of finance and the discount rate applied to investment.

The whole referendum story and particularly the rush by all three major political parties to offer whatever it took to maintain the union, has sparked off a serious debate about devolved powers throughout virtually all regions of the UK.

The impact of this over time is difficult to assess albeit we believe that it could have a positive impact on the larger regional cities, improving both occupational and investment demand.Phew!

In our view, there would have been very few positives arising from a vote for Scottish independence; we should all breathe a sigh of relief! However, there is one clear message that we should all take from what has happened; for most, the risks relating to Scottish independence were not considered particularly highly, perhaps demonstrating how quickly things can change and underlining how important risk management remains, even when the market is doing well.

Ian Whittock, CIO, KFIM


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