EUROZONE: Yay or nay

As a spectator and a newbie US resident myself, it has been fascinating watching how Scotland’s independence vote was being received in New York as well as in Europe last month.

A few days ahead of the vote, one residential property manager in New Jersey said to me: “It’s scary. I mean, I love continuity. Scotland and England have always been together, you know, Britain, and World War Two. It looks like it is 50:50 now – holy cow. Hopefully, it doesn’t affect much but they have to figure out currency, everything. Oh my god, they’re stupid!”

Meanwhile, my inbox became brimful with comment about what independence of Scotland from the rest of the UK would mean. Scottish house prices could tumble by 17.5 percent following a Yes vote like they did during the financial crisis, warned Zoopla, a residential property data website.

The property site argues a Yes would introduce uncertainty about tax, currency, and interest rates, and mortgages could become harder to come by. Home owners could be earning wages in a new currency but stuck with mortgages in sterling which would leave them exposed to currency fluctuations, struggling to pay their mortgage and in negative equity.

There were recent pronouncements by a number of large businesses and employers in Scotland that they intended to move to England should the referendum deliver a Yes. One example would be Standard Life, the insurance company. Though in that case, it sounded more like it had contingencies in place to service UK customers from offices outside of Scotland if a vote for an independent state triumphed, which people were saying was highly improbably until just recently ahead of the vote (and our press deadline).

On the other hand, a Yes vote could be great news for Scottish real estate brokers as their hands might become very full indeed with new instructions. A free New York newspaper quoted someone running a consultancy firm who said they would be minded to open an office in Scotland if it separated, whereas he never saw the need before.
Meanwhile, the rest of the UK will have to do without Scotland’s economic input (even factoring in arguments about dwindling oil and gas supplies), warns Schroders in a worrisome economic assessment.

However, probably my personal favorite was a press release on 5 September saying “New Golf resort planned for Scotland”. There is zero reference to the Scottish vote for independence, which is why I like it. It just says: “A consortium of British businessmen has put its weight behind a development of almost 500 acres on the outskirts of the Scottish capital.” It continues: “While Scotland enjoys a good level of corporate visitors, larger global companies looking to accommodate 200 or more delegates under one roof are limited in choice.” One is left to ponder: if Scotland became independent, would more global companies want a corporate-do for more than 200 people in Glasgow, Edinburgh or Aberdeen? The golf resort owners must surely believe so.

As far as commercial real estate investment goes, in reality, a massive slowdown has taken place during this period of uncertainty. But there have been exceptions.
Kennedy Wilson Europe has reportedly agreed to buy the Fairmont Hotel in St Andrews, Orion Capital Managers just exchanged on buying East Kilbride shopping center for £180 million (€225 million; $292 million) and another opportunity fund, Moorfield Group, has confirmed it has bought Aberdeen & Innovation Parks in the oil rich city of the same name for £34 million. AEW Europe has also invested.

In these cases, it appears that smart firms have been operating with a risk premium in mind. They have been factoring in the many downsides of independence. So long as value buyers such as AEW Europe could buy something in Scotland at a price reflecting at around 300 basis point risk premium to an equivalent property in say northern England, they believed they would be covered if a Yes vote came in, and rewarded with a bonus if a No vote ensued.

Value add investors have seen cap rates rising to reflect nervousness about investing in Scotland, and AEW tells me its UK core fund acquired an industrial unit near Edinburgh airport and also an out-of-town office asset in Edinburgh both of which were trading well below their intrinsic property value and well above the 300 basis point risk premium.
At press time it was unclear which way the vote would go, but for smart money willing to take a bet or able to attach a risk premium to property assets with good underlying value added qualities to them, the capital got deployed months ago. Whichever way the vote goes, they believe they should do well.

But coming back to how the Americans view this, there was a confluence of opinion mounting on Capitol Hill that a Yes would weaken the UK-US strategic relationship. Yes, Americans are trying to be politically correct by saying this is a matter for Scotland and its people but it was clear the US did not want this to happen.