By Colin McLean

Can Scotland adapt to the turmoil in property?

Changes in consumer behaviour and technology are making new demands on office space, retail, and our homes. The worldwide real estate boom, driven by a long period of low interest rates, has peaked. Higher borrowing and construction costs have delivered a reality check for the sector, turning attention to how existing buildings can be repurposed. It presents opportunity for Scotland’s cities and towns, but thoughtful planning is needed.

International problems may seem far removed but there is a warning in the collapse in New York office values and the unwinding of a speculative residential property bubble in China fuelled by borrowing. Not least, bad loans and losses will change the attitude of global banks, choking off finance. Already in the UK many property funds trade at big discounts to asset values, highlighting investor caution. It has triggered vacant space and forced selling.

While there is some new demand, it is no longer for large single-occupier office blocks or for buildings that do not meet modern requirements for energy performance and hybrid working. Companies are re-evaluating their space needs, aiming for more flexible work environments.

Obsolescence is hitting values and it is not easy to convert buildings no longer fit for purpose. A two-tier market is developing in cities, where prime properties that offer good location and modern facilities combined with lower running costs are in demand but others built last century sit empty. Not all are suitable to be turned into residential use.

These challenges may also lie ahead for the housing market, with many homes unable to meet good energy performance standards against a background of high mortgage costs. Despite a supply squeeze of affordable new housing, average house prices have recently fallen in all UK regions.

Confidence remains weak, with changes in the rental market also cited as a factor in the uncertainty. New homes are needed, but addressing climate change and energy performance needs creativity in updating older properties. Currently, solutions seem limited. Office occupiers can move and leave their old energy-inefficient premises behind, possibly to be demolished, but at a national level that does not work for housing.

Retrofitting existing buildings to meet higher energy efficiency standards will need finance, but that may be a problem. Banks are rightly cautious about lending for energy performance improvement. While it might be part of a renovation to prevent loss of value in an older domestic property, justifying the investment to a lender can be difficult.

The climate emergency demands action, but setting energy performance standards on rental properties alone will only tackle a part of the housing market. There is some funding for homeowners via Home Energy Scotland, but with limited overall impact.

Scotland’s shopping centres are also grappling with the rise of e-commerce and changing consumer preferences. These spaces need to become mixed-use developments that incorporate residential, commercial, and recreational elements.

Many out-of-town centres now look very tired, unsuited to today’s lifestyles. In contrast with high street retail, these spaces are harder to repurpose. A number of initiatives are under way to revitalise city centre shopping in Scotland’s major cities but the process is slow and a broader, more holistic, vision may be needed.

The combination of a property bubble unwinding alongside a major change in work-life patterns means many buildings today are not what Scotland needs. There is much to be gained from getting this right. Building use and planning is driven by local authorities but Scotland has opportunity for a national conversation on the current challenges.

Not a planning consultation on specific developments, but a higher level discussion to look at how the change is being handled in other nations and what guidance can be given.

Developers and the private market are unlikely to have the vision and civic focus that we need now. Property transformations require significant investments, thoughtful urban planning, and collaboration between stakeholders.

Colin McLean is a director of SVM Asset Management Holdings