Lismore’s final 2022 review predicts opportunities in a more liquid Scottish investment market

Lismore's final 2022 review predicts opportunities in a more liquid Scottish investment market

Property advisory firm, Lismore Real Estate Advisors, has released its review of the Scottish investment market for the final quarter of 2022, along with predictions for 2023.
The review predicts opportunities in a more liquid Scottish investment market.

Simon Cusiter, director of Lismore, said that the speed and extent of the pricing correction that has taken place in the latter half of 2022 has caught even the most seasoned experts by surprise. However, he added that as with most market shocks, there comes opportunity, and we predict continued demand across various sectors, in particular, prime PBSA and BTR.

He said: “In addition, retail warehousing still offers good value, particularly in urban locations, anchored by food/value retailers and with a drive-thru offering. The sharpest outward movement in pricing has been witnessed in offices and distribution, with the latter expected to find its level quickly, particularly around the central belt where we will see further rental growth.”

These views are borne out by the latest investor research undertaken by Lismore, with respondents ranking the top three performing sectors for 2023 to be: Living (42%), Distribution (32%) and Food stores (30%). Growth in the living sector continues to be driven by an undersupply of PBSA, BTR and senior living accommodation in the key cities.

High street retail could be the dark horse for 2023, with retailers having success in driving shoppers back through promotional activity and free returns, whilst the business rates revaluation coming into effect in April 2023 offers significant reductions in their total occupational costs.

Funds were the biggest backers of food stores in the top three sectors with an expectation of further sale and leaseback transactions by the big four chains and continued buoyancy in the sector.

Lismore’s research indicates that a significant majority (65%) of respondents expect to be net buyers in 2023, with only 12% expecting to be sellers. Buying activity is likely to be from quarter two onwards, with the first few months of 2023 expected to see limited new stock on the market.

The main buyers over the next 12 months are likely to be property companies (84%) and investment managers (74%). Only 13% of funds expect to be net buyers and with 50% of responses neutral, it appears to be a watching brief from the funds.

By the end of 2023, 69% of investors anticipate an improvement in market sentiment. Investment managers are almost unanimous (90%), whilst over 50% of funds and property company respondents expect sentiment to improve. It was also noted that there is potential for a swifter bounce back should the macro-economic environment continue to stabilise during the first quarter of 2023.

Simon Cusiter continued: “We have seen increasing appetite from Hong Kong and Singapore, as investors look to move capital into the UK, including Glasgow and Edinburgh. Helped by the stronger dollar, opportunistic capital, particularly from North America and the GCC (cash buyers) are best placed to take advantage of the current market dynamics over the coming months and many of the private equity and sovereign wealth houses are eyeing the Scottish market with interest.

“With values adjusting anywhere between 10-30% across different sectors, it feels like the opportunity has arrived quicker than anticipated. Trying to second guess if the correction has fully played out is not easy but those best capitalised and bravest will be first to move and likely to find best value.

“Even if pricing moves further, the opportunity to acquire better quality assets in a less competitive buying environment will prove attractive to investors and we anticipate a more liquid market in 2023.

“PBSA will be most in demand as the strong demand / supply imbalance continues, with rental growth managing to off-set operational cost increases, hence the investment rationale remains positive and development appraisals for new stock are continuing to make sense. We anticipate more clarity around the current rental freeze legislation which should give investors more confidence to push ahead with a number of new schemes in both Glasgow and Edinburgh.”

Tom Hoye, real estate transaction director of Redevco, added: “Markets tend to over-react and in that sense any downturn represents a good buying window. The question is how long that window will be open for and when is the optimum time to get back in, especially in the context of there being a lot of equity available. At the moment a lot of investors are taking stock and we’re definitely in a period of ‘price discovery’, but I expect there to be more activity in the second half of the year.”

“Finally, despite the recent market volatility and subdued final quarter, total volumes for 2022 ended up at £1.77bn, an increase of 32% on the total for 2021. Investment volumes for quarter four traded at £396m, which is 24% down on quarter four of 2021 and 20% below the five-year average. Bearing in mind the range and severity of the headwinds faced during the year, the final outcome can be described as reasonable.”

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