Colin Whitelaw

2006 looks destined to be remembered fondly by many Scots for its long hot summer. Investors in Scottish property, though, are more likely to remember this summer as the time when a yield gap returned between prime and secondary properties in the heat of a market that continues to be buoyed by a range of investors keen to pump money into property.

These investors comprise not only financial institutions and fund managers but also overseas and individual property investors, many of whom are entrepreneurs that have taken control over their own affairs by investing directly in property themselves due to a dissatisfaction with the returns from their pension funds. It has been this steady supply of money into the property market from investors, rather than rental growth, which has kept property values at record levels.

However, with interest rates having crept up recently and looking likely to creep up further, coupled with a lack of rental growth, valuers and lenders have realised, albeit belatedly, that primary and secondary yields are simply too close. As a consequence, the market is currently adjusting to re-establish the traditional gap between primary and secondary property yields.

Whilst prime yields have, if anything, grown firmer over recent months - a reflection of the fact that good quality stock will always be in demand from institutions - there are some secondary properties that have failed to sell or whose yields have fallen as valuers, banks and investors have realised that secondary and tertiary properties have been over-valued.

Consequently, there has been, and continues to be, a degree of adjustment in the market to reassert the true distent between primary and secondary property yields, though a noticeable feature of the market in Scotland is that yields tend to be firmer than those south of the border as, in general, the Scottish property market is less volatile in Scotland than it is in England.

These market trends have required some lateral thinking on the part of investors and particularly property companies. For example, rather than acquiring secondary properties with a view to adding value to them and increasing the rent through hands-on asset management, some investors, particularly property companies, have instead moved into Europe, returned to development or looked at other classes of investment, such as leisure and healthcare.

And some investors have realised that better margins can be achieved and there is more scope for adding value from acquiring properties in less fashionable locations, towns like Inverness or East Kilbride, which risk averse investors tend to aviod, rather than in Scotland’s major cities.

Indeed, one of the largest sector of property transactions over the last few years has come from owner/occupiers selling their property assets and returning that capital into their core business and that’s a trend that looks likely to continue since the highest percentage of commercial and industrial property in the UK remains owned by owner/occupiers.

The government realised the benefits to be had from outsourcing property ownership years ago, introducing the PFI and PPP programmes to build new schools and hospitals, and the same principle of property sale and leaseback still has a major role to play in helping owner/occupiers maximise the potential to be had from their core business.

The summer months might have re-established a yield gap between primary and secondary properties. This may see a return by the Property companies to the secondary property market, but there is also going to be a healthy supply from owner/occupiers realising assets.

Colin Whitelaw is Chief Executive of Property Investor Partnerships