Galbraith Commercial Matters Winter 2017

Commercial ISSUE 6 | WINTER 2017-18

MATTERS

Sandstone's enduring allure •T he industrial and logistics market •E ducational property management •R ating changes aim for growth •A ll smiles in Armagh •A fter the Grenfell disaster •N ew rules on money laundering

WELCOME

CONTENTS

Strength in shared knowledge WELCOME to the sixth issue of Commercial Matters in which we hope you will find a range of interesting and informative articles highlighting just part of the wide range of expertise and knowledge within our commercial team.

Our first issue was published only two years ago in the aftermath of the Scottish Independence Referendum, and we still find ourselves in a climate of political and economic change. The old adage of change heralding opportunity is one which is critical for business, occupiers and investors, and it is imperative for their advisers to be able to spot the opportunity and be entrepreneurial with the advice given.

4 Planning reform.

An Irish success story.

5 Rating changes aim for growth.

6 Case study: Asset management.

Richard Higgins richard.higgins@galbraithgroup.com 01786 434625

GALBRAITH is Scotland’s leading independent property consultancy. Drawing on a century of experience in land and property management, the firm is progressive and dynamic, employing 236 people in offices throughout Scotland. We provide a full range of property consulting services across the commercial, residential, rural and energy sectors.

7 After Grenfell.

8 Managing an educational property.

9 Deal round-up.

10 COVER STORY: Townhouse appeal.

11 Money laundering rules are changing.

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Will Sandwell and Jamie Thain provide a snapshot of the industrial and logistics investment market.

The fundamentals are often more familiar and industrial assets can be less management intensive and less costly when it comes to recycling tenants, though there are always exceptions.

Galbraith provides a personal service, listening to clients and delivering advice to suit their particular opportunities and circumstances.

Like us on Facebook: www.facebook.com/ GalbraithPropertyConsultancy

MARKET VIEW

THE industrial sector has always been popular with investors, historically offering consistently higher yields than the office and retail sectors.

In Galbraith we are fortunate to have teams of leading professionals not just in our commercial property division but across all the sectors we are active in, from energy to rural and residential. Our shared knowledge, culture and skills are important in being able to offer that joined-up thinking to our clients.

We have continued to invest in our people and systems, and have transitioned to our new property management system, Qube, which will enable us to deliver enhanced financial performance information, analysis and give our surveyors and accounts team the tools to continually improve on our service delivery. We are ambitious and excited for the months and years ahead and look forward to continuing to work with our valued clients and forging new relationships.

Good stock is in short supply

Commercial Matters is produced by J ­K Consultancy, Glasgow, and designed by George Gray Media & Design, St Andeux, France. © CKD Galbraith LLP.

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As investors become more diligent and sector specialist investors evolve, it is perhaps unfair to generalise within the wider “industrial sector”.

Here, we explore some of the characteristics and trends in a UK and Scottish context.

The big box ‘sheds’ Larger industrial assets (100,000 sq ft plus) such as distribution and logistics properties are often let on long leases (15 years plus) and to national or international tenants with strong covenants.

This creates investment lot sizes of £10m plus with long-term income and as such these assets attract institutional investors requiring sector diversification. The buildings themselves are often modern, well specified and in strategic locations (close to major motorway intersections etc). This means the weight of money chasing such stock can be huge and so pricing becomes inflated and yields compress into the 4.25% to 6.00% range depending on specifics.

Nevertheless, the investments only exist if the tenants are active and create demand. For instance, in the past 18 months “e-tail” giant Amazon has been busy and has leased more than 8m sq ft over the UK alone. We have also seen parcel delivery occupiers such as DPD continue to recycle their UK distribution depot network, leasing new-build 40,000 to 80,000 sq ft premises across the UK. These units

have often been leased for 20 years and have attracted yields of between 5.00% and 5.25% in Scotland and lower south of the border.

Mid-sized opportunities Investment lot size is an interesting aspect to explore. In the past 18 months we have seen institutional funds focus on £10m-plus assets, while most private investor interest thins out above £2m. This creates opportunity in the £3m to £8m lot size range. We feel there is slightly less competition and therefore this becomes an ideal hunting ground for company pension funds, REITs, property companies and private investors with larger portfolios.

Quality single-let assets are likely to be let to strong national covenants and generally be in good locations. A lack of new development in recent years has created a supply shortage of such units, so rental growth over the short-term

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Rental growth over the short-term is a real feature now.

is a real feature now. Multi-let industrial assets have different dynamics but a well-considered business plan, which may include capital expenditure, is also likely to generate solid rental growth in this area.

Scotland Political uncertainty in Scotland has somewhat subsided, and our market exposure shows there is a vast weight of money readily available to invest in all types of industrial property in Scotland. That said, there remains a clear yield discount when compared to England.

The issue for Scotland at present is availability of quality industrial stock, and we feel this will catch out occupiers before investors. Those already invested can benefit from a restricted

supply which supports rental growth (a negative for tenants) and those occupiers rolling out national expansion or estate improvement plans are often surprised when they come to Scotland and realise there are few up-and-built quality options.

From an occupier perspective, we advise our corporate occupier clients who are seeking to buy or lease 30,000 sq ft plus to start their search at least 20 months before they need to be operational. This allows time for search, identification, negotiation and development.

For investors, quality stock that is offered for sale is very popular, so we recommend detailed analysis to be considered in the context of the client’s investment requirements and the specifics of the current market before entering into competitive bidding situations.

Above left: Eurocentral is a prime distribution location close to the M8.

Above: Largescale high quality distribution premises are particularly attractive to institutional investors.

Below: The Galbraith investment team acquired HSS, Bellshill for a private investor client in October 2017 for £4.125m.

Current yield ranges for Scottish industrial investments are: • 15 year single let income: 5.00% to 5.75% • Quality single let assets providing 5 to 10 years income: 6.00% to 7.00% • The best multi-let estates close to city centres: 5.75% to 6.50% • Older multi-let estates: 7.00% to 10.00% Our investment team are some of the most active agents in the Scottish industrial sector, having advised on more than 1.5m sq ft of industrial deals in the past three years.

If you would like to discuss industrial investment opportunities, large or small, single let or multilet, old or new, please don't hesitate to contact us.

will.sandwell@galbraithgroup.com 0131 240 6997 jamie.thain@galbraithgroup.com 0131 240 6994

galbraithgroup.com | Commercial Matters Winter 2017-18 | Page 3

Planning: Reforming the Scottish system Lauren Springfield takes stock of the changes likely to be included in the forthcoming Planning Bill.

SINCE September 2015, the Scottish Government has been undertaking an independent review and public consultation on planning system reform.

In the Places, People and Planning position statement published in June, Scottish government outlined 20 “proposed technical changes”. The first step for implementing these changes will be the Planning Bill, which is due to be put before Scottish Parliament in December.

Although it has not been made public which changes will be included in the Bill, there have been indications born from the consultation process and the recommendations of the position statement. The Galbraith planning team is keen to see how the following changes are legislated:

Rehoming strategic planning • Strategic planning to become the responsibility of a strengthened National Planning Framework • Strategic Development Plans to be removed • Strategic development will be driven by new vehicles called regional partnerships, the delivery of which will be aided by additional discretionary powers to be given to local authorities.

Restructuring Local Development Plans

• Extending the Local Development Plan (LDP) plan period from five to 10 years • Building in triggers and processes to enable the LDP to be updated within the 10-year period • Reducing the LDP preparation process from five years to two or three years • Removing the Main Issues Report stage • Introducing a “gatecheck” stage with the DPEA prior to producing the draft plan • Removing supplementary guidance documents.

Fees

The position statement recommends that the Bill includes additional powers to expand the types of services for which planning authorities and agencies are able to charge fees. However, the mechanism for this will likely be brought forward in secondary legislation.

Streamlining decision-making

In order to lighten the burden on the planning system the position statement recommends expanding permitted development rights and simplifying development management procedures. lauren.springfield@galbraithgroup.com 01786 435 040

When Irish eyes are Pam Over reports on her latest completed project.

GALBRAITH recently completed our role as project monitors on a new distribution and headquarters facility for Bunzl plc in Armagh, Northern Ireland.

A long-standing client of Galbraith with whom we’ve worked for on a number of projects, Bunzl is a successful international distribution and outsourcing group with operations in 30 countries across the Americas, Europe and Australasia.

A large site had been identified in Armagh, Northern Ireland, for Bunzl’s new distribution facility, which allowed them to amalgamate five existing smaller units within the locality under one roof.

It was big enough to accommodate their long-term aspirations and give them enough space for future development of the business.

I was asked to help with bringing this complex project into reality.

The role involved agreeing the terms of the specification and design as well as the main lease and major legal negotiations to ensure the developer (landlord) constructed a building that was designed to specifically meet Bunzl's needs.

The building comprises 70,000 sq ft of warehouse space with 10.5m eaves and 15,000 sq ft of offices all set in a parkland environment. The

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contract value was £4.5m with a build period of 45 weeks.

The most complex challenge was getting the pre-construction documentation agreed and in place. Following that the developer appointed Russell Brothers as main contractors. Their attitude and overall standard of workmanship was outstanding while their focus on collaboration and finding solutions instead of creating hurdles was hugely refreshing.

Needless to say, once on-site the project ran smoothly and to time and budget, with regular on-site inspections ensuring the quality of the construction was maintained.

Rating changes aim for growth Calum Innes reports on the Scottish Government’s response to the Barclay Review on non-domestic rates.

smiling

IN AUGUST, Ken Barclay, the former chair of Royal Bank of Scotland, submitted his review of non-domestic rates to the Scottish Government.

ratepayers to provide information to assessors.

• The creation of a 'general antiavoidance rule' in an effort to stop rates avoidance tactics.

The parameters of his review might be open to criticism as the remit was to be revenue neutral, however, his 135-page report contained 30 individual recommendations. The Cabinet Secretary for Finance, Derek MacKay MSP, recently made a statement outlining the government’s response.

The government has largely accepted Barclay’s proposals, however, there were two recommendations that the Minister was at pains to advise that he had decided not to put forward at this time.

The key proposals, which have gained government support, are: • More regular revaluations; to be three-yearly rather than fiveyearly, with the tone date being brought forward from two years prior to one year.

• Introduction of ‘a business growth accelerator’ i.e. a 12-month delay to be introduced before rates are increased when an existing property is expanded or improved and also before rates apply to any new-build property.

The client’s distribution centre is now fully up and running and the local Bunzl team were a pleasure to act for. I thoroughly enjoyed the two years spent working on this project.

It is one of the smaller projects I have been involved with lately but it was very rewarding as the end product is so good. It is fair to say the pre-construction legals took a long time to resolve, but the end result has everyone smiling.

pam.over@galbraithgroup.com 0131 240 6965

• A separate review of the plant and machinery regulations, with a particular focus on how they impact upon the renewable energy sector. In the interim, Mr MacKay has announced his intention to grant a relief of 60% in relation to hydro-electric generation subjects.

• There were a number of matters relating to reliefs, and, whilst the government has voiced its support to introduce a new relief for day nurseries, it has also committed to undertaking a review of the Small Business Bonus Scheme and giving consideration to the removal of charity relief for independent schools and university accommodation and other charitable institutions.

• The introduction of a new civil penalty to encourage

The first is the proposal to put farms on the Valuation Roll, albeit the suggestion was to grant 100% relief, the driver being to encourage transparency in that there is no clarity as to the cost of agricultural de-rating.

The second recommendation to be set aside is that largescale commercial processing on agricultural land should not benefit from agricultural de-rating.

The reason given was that such measures would create a significant administrative burden on assessors at a time when the focus should be on the improvement of the service they provide and delivery of more frequent revaluations.

The minister added that in disregarding these recom­ mendations he wanted to be clear to the agricultural sector that his government recognised its contribution.

The arguments presented by the government in support of these recommendations are an attempt to improve the economic prosperity of doing business in Scotland and to improve the effectiveness of the rating system which, it appears, is certainly here to stay despite calls from various factions for it to be scrapped in favour of alternative property taxes.

calum.innes@galbraithgroup.com 01738 456075

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ASSET MANAGEMENT CASE STUDY

Testing the market Property: Stonegate, York Asset manager: Pamela Gray Client: Private investor The asset management role: As the client’s asset manager, my focus is always on maximising overall returns from the investment portfolio by driving rental performance, minimising voids through active management and regular communication with tenants, and being reactive to market opportunities.

The building: The property comprises a Grade II* listed 17th century four-storey retail unit with many original features, in a strong retail location in York city centre.

“

We knew there was pent-up demand, but the level of interest surpassed all expectations.

The historic minster city of York lies about 190 miles north of London and 23 miles east of Leeds. The city is recognised as the principal commercial and administrative centre for North Yorkshire as well as being a significant tourist destination, welcoming about seven million tourists annually.

The property is located in Stonegate, which is a popular pedestrianised retail street within the historic centre, literally in the shadows of York Minster to the south. The street has a substantial pedestrian footfall and is home to many national multiples including Jigsaw, Links of London, The White Company, Jack Wills, Jo Malone and Cath Kidson. Units seldom come to the market and, as a consequence, many retailers are still seeking representation.

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The marketing process: The previous tenant’s administration presented our clients with a golden opportunity to test the open market.

We knew there was pent-up demand, but the level of interest surpassed all expectations. We received multiple offers from a range of wellknown companies before agreeing final terms with Abraham Moon & Sons Ltd (Moons), a 180-year-old Yorkshire-based wool, fashion and interiors business, for their new flagship store.

Moons has a “vertical” mill based in Guiseley, Yorkshire where all their production is undertaken, turning raw wool into luxury finished products. They employ 225 people and supply 100% wool fabrics to the best fashion and homeware brands including Burberry, Dolce

More than just cladding Martin Cassels puts cladding under the spotlight in the wake of the tragic Grenfell Tower fire.

THE subject of cladding panels is a highly emotive one after the recent tragic events at Grenfell Tower in London.

Many building professionals will have fielded numerous questions about cladding from concerned tenants, occupiers and residents as they understandably scramble for information about the cause of the rapid spread of the fire, which resulted in such devastating loss of life.

and Gabbana, Ralph Lauren along with John Lewis and Boden. Its interior fabrics can be found in stately homes and castles, and since 2009 it has manufactured its own range of fashion accessories. More details can be found on www.moons.co.uk.

The deal: Final terms were agreed with Moon to enter in to a new 15-year FRI lease without breaks and subject to five yearly reviews at an initial rent of £62,000 pa.

The analysis: The initial rent on the letting represents a Zone A (20ft) rate of £135 psf, with the resultant capital value having more than doubled as a result of the deal.

Project works: Both parties have already invested substantially in the building. Our client, the landlords, agreed to undertake a programme of external fabric repairs and internal structural repairs in order that the premises could be handed over in FRI condition. The landlord’s works were monitored by the Galbraith building consultancy team with a project duration of 22 weeks and a contract sum of circa £175k.

Being a Grade II* listed building, works had to be carefully specified to be sympathetic to the fabric. No Listed Building Consent was required, but there was close liaison with York City Council throughout the project.

The tenants have now completed a very significant fit-out including the upper floors as they are retailing across three floors in the building. The flagship store officially opened its doors to the public on October 14, 2017. pamela.gray@galbraithgroup.com 0131 240 6963

It would be unwise to speculate about the full causes until the public enquiry has been completed, however, much press focus has been on the cladding panels themselves.

What can be said is that buildings are complicated and the specification and detailing around cladding panels, especially for high rise buildings, is highly technical.

Modern construction methods use cladding panels on many different types of buildings, from industrial to offices, and it may come as a surprise to know that there was a crisis with composite cladding panels in the past.

In the early 2000s, following some serious industrial building fires, the spotlight turned to composite cladding panels with a certain type of core which was highly flammable.

In those specific cases, the core could burn while the structure of the panel remained intact and only when it lost its structural strength did the cladding panel collapse.

Fire could spread throughout a building unnoticed, with devastating consequences when it eventually gave way.

The situation at Grenfell is likely to have been different, and early indications are that an aluminium composite material was used with a filler and insulation material, the combination of which appears to have been combustible. Combined

with other factors such as fixings, and the building height and design, this may have exacerbated the problem.

In this time of 24/7 news reporting and social media, it is easy to draw conclusions and assign blame when not all the facts are known; the truth will only come out at the end of the public enquiry, but it is certainly the case that following such tragedies, as history sadly shows, substantial refinements to building regulations and standards of construction are often needed.

Much discussion has also centred on the design of the tower block with a single staircase, which was typical of buildings constructed around the time. Of course, modern construction methods are very different and more than one staircase is now standard.

The installation of sprinklers would certainly have helped although they are likely to have been dismissed as prohibitively expensive or practically difficult to install. Many modern buildings are fitted with sprinklers, especially in high fire risk areas, and they are highly effective.

It is not the case that when one sprinkler head is triggered all the sprinklers in the building are activated. This is a false impression created by the film industry.

Each individual sprinkler head operates independently.

It will be interesting to see if the building regulations surrounding the use of sprinklers changes significantly for both high rise buildings and other buildings.

In terms of advice to clients and tenants, the main message is not to panic and assume that all cladding is dangerous, but to ensure that the documentation for the specific cladding panel used meets the requirements of the Loss Prevention Council (LPC) and the building regulations, and in the case of high rise buildings, cladding tests are carried out if they have not been already.

martin.cassels@galbraithgroup.com 0131 240 6992

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On-site with the contractor overseeing the installation of the roof structure at the school’s new theatre.

Managing an educational property George Bouwens joins Galbraith from a background in traditional building surveying, spending five years in Kenya managing building projects and, latterly, the estate management of a large boarding school. Here, George provides insight to the major challenges of working in Kenya and how the basic principles of managing an educational estate remain the same.

ST ANDREW’S School, near Nakuru in western Kenya, was founded in the 1930s primarily for the children of colonial settlers and has successfully repositioned itself to cater for children across east Africa and also a large Nigerian following.

Construction skill levels, particularly in rural areas, are low, so while it was tempting to use new technology, buildings needed to be designed with that in mind to deliver a quality product that could be maintained. Relatively simple building techniques and a low labour cost meant buildings were typically completed for 25-50% of the cost of a comparable UK project.

Health and safety legislation was present, although not strictly enforced. Contractors tended to see anything other than basic protection of the works as an unnecessary layer of cost, which many clients were content not to cover. This, combined with little attendance from the supervising authorities, especially in rural areas, meant it fell to the client to dictate safe on-site working practices. Planning and building control was also poorly enforced and so it was down to the client to ensure that building standards were adhered to. However, we tended to exceed the minimum requirements by a significant margin.

While there are many differences in attitude, environment and working practice, the following basic principles of managing an educational estate are the same wherever it is in the world.

Strategic planning Having a clear, short, medium and long term strategic plan for the school enables accurate planning of major capital expenditure projects and allows ample time to procure the projects.

This can also help drive project fundraising.

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Planned Preventative Maintenance A detailed schedule of PPM allows for a proactive approach to building maintenance works that are fully priced in advance of commencement and programmed to take place during school holidays to avoid disrupting the day-to-day operation of the school.

Fire insurance assessment Accurate assessment of reinstatement costs of a diverse variety of buildings ensure that they can be fully insured at realistic and up-to-date values.

Project management Having a dedicated project manager to control time, quality and cost, ensures delivery of a fully compliant end product.

The regular presence on site of an experienced building surveyor, who fully understands site nuances and client requirements, as well as being on hand to provide detailed advice on specific building issues improved decision-making and the ability to react to site developments.

The Galbraith building surveying team has detailed knowledge of all building types and understands the operational limitations of a busy institution with a diverse property portfolio. We offer a range of services tailored to support and assist with the running of schools from both a day-to-day and longterm perspective and to preserve the value of your assets.

george.bouwens@galbraithgroup.com 0131 240 3031

DEAL ROUND-UP London House, East London Street, Edinburgh Activpayroll, who are global leaders in payroll services, has taken the second floor of London House, extending to 323 sq m (3,482 sq ft).

The new five-year lease was agreed at £15.50 sq ft. Galbraith acted for the landlord who is delighted with the deal and the new rental level for the property, clearly showing the demand in the market for quality space.

The now fully let building offers a strong tenant mix, providing a professional and diverse working environment. A high specification ground floor suite in London House, extending to 176 sq m (1,895 sq ft), will become available in early 2018.

Scotia Bank House, South Charlotte Street, Edinburgh

Shopping Centre, Glasgow, for £2.3m.

Springburn Shopping Centre is a 78,000 sq ft covered shopping centre which includes a 24,500 sq ft anchor store with 31 further retail units and 270 car parking spaces, on a site of approximately five acres. The centre, which produces a net income of more than £330,000 per annum, provides most of the area’s total retail offer and is occupied by a combination of national multiple and local businesses.

Hampden & Co has expanded into the 289 sq m (3,108 sq ft) third floor of Scotia Bank House on South Charlotte Street. The office is located within immediate proximity of Charlotte Square, one of Edinburgh’s most prestigious business locations.

It provides good quality open plan office accommodation behind a listed Art Deco stone façade. Galbraith acted on behalf of the landlord, Thistle Property.

7 Walker Street, Edinburgh Galbraith has recently completed the sale of 7 Walker Street, a full townhouse in the West End of Edinburgh, on behalf of private clients. The recently refurbished Category A listed property, let entirely to Robinson Medical Recruitment, was sold to a private investor for £1.27m, reflecting a net initial yield of 4.92% and a capital rate of £406 per sq ft.

Crichton House, Crichton’s Close, Edinburgh Galbraith acted on behalf of the Scottish Building Federation to surrender part of their lease on the first floor of Crichton House whilst securing Geowise on a new three-year lease on the space. The interactive mapping service relocated from Holyrood Road to the 98 sq m (1,055 sq ft) suite at £20 sq ft.

INVESTMENT DEALS Springburn Shopping Centre, Glasgow

Top: London House, Edinburgh.

Acting on behalf of a property company client, Galbraith has sold Springburn

Below: Springburn Shopping Centre, Glasgow.

Above: Scotia Bank House, Edinburgh.

The building benefited from mediumterm income while also offering the purchaser the longer-term option of residential conversion. See article on page 10.

2 James Street, Bellshill Acting on behalf of a private investor, Galbraith has acquired 2 James Street, Bellshill. The high quality refurbished warehouse unit, extending to 52,857 sq ft, is let to HSS Hire Service Group Limited until November 2026 at a passing rent of £264,285 per annum.

The property was purchased for £4.125m, reflecting a net initial yield of 6.04% after allowing for purchaser’s costs. The current shortage of supply in Central Belt industrial property and lack of recent development in the sector is driving rental growth which we expect to see continue throughout our client’s ownership of this asset. See article on page 3.

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The attraction of sandstone townhouses Jamie Addison-Scott looks at the enduring investment appeal of one of Edinburgh's most elegant office solutions.

TOWNHOUSE accommodation is the oldest and most traditional form of office space in Edinburgh.

The conversion of former residential dwellings to offices was seen as an efficient way for businesses to secure city centre space and their ‘own front door’. Townhouses tend to provide accommodation from 500 sq ft when let in part and up to 5,000 sq ft when let in their entirety. The attractive historic buildings are all generally category Aor B-listed and no more will ever be built so the existing stock is finite.

By their very nature, townhouses appeal to a variety of businesses but they are particularly popular among boutique financial, fund management and professional service sector firms. The interest from office occupiers tends to focus on townhouses in the traditional West End, the core central business district between Charlotte Square and St Andrew Square.

Over the past 10 years the Edinburgh townhouse market has proved to be very popular among investors. Private investors especially have been highly active in this market, driven principally by the lot size of the investments created (typically between £500,000 and £1,500,000) and values, which are increasingly underpinned by the residential conversion potential of the buildings.

In addition, the listed status of the buildings means that, at least for the time being, they do not attract vacant business rates when accommodation is available to let between occupiers.

With this increase in demand for townhouses to be converted back to residential use, supply of these properties for office occupiers is slowly diminishing. Consequently, rents are increasing, thus providing investors with growth potential in their assets.

Recent lettings in the West End townhouse market have created rental evidence in excess of £22 per sq ft, with well-presented prime city centre townhouses capable of achieving rents in excess of £25 per sq ft.

Another attractive investment quality of townhouses is the almost constant level of demand from businesses seeking this type of office accommodation. The townhouse market is not unaffected by difficult market conditions, but in some aspects it is more resilient than the traditional Grade A and Grade B office markets due to the flexibility of the buildings and their ability to offer occupiers a variety of accommodation options, ranging from small single rooms or multiple rooms and floors to entire buildings.

Galbraith has recently completed the sale of 7 Walker Street, a full townhouse in the West End of Edinburgh, on behalf of private clients. The recently refurbished Category A listed property, let entirely to a single office occupier, was sold to a private investor for £1.27m, reflecting a net initial yield of 4.92% and a capital rate of £406 per sq ft.

The building benefited from medium term income while also offering the purchaser the longer-term option of residential conversion.

Vacant Possession Rate

The sale of buildings like 7 Walker Street highlights the yield compression seen within the Edinburgh townhouse market over recent years. During the past five years we have seen yields move from around 6.50% to less than 5.00% for the best quality stock. Strong pricing and liquidity of townhouse assets is driven by property fundamentals such as micro-location and building condition. Top-end pricing is driven by competitive bidding situations or off-market exclusivity.

The benchmark vacant possession rate for townhouse properties has also seen considerable upward movement during the past five years (see graph), moving from around £175 per sq ft to over £300 per sq ft in prime locations.

This increase is driven predominantly by the growing demand for office to residential conversions. Location is key when determining the value of a townhouse with vacant possession.

The surge in demand for Edinburgh townhouse office to residential conversions is driven by increasing residential prices within the West End and New Town due to the renewed

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Money laundering: Don’t get caught out by new regulations Will Sandwell and Jamie Thain bring you up-to-date on the new money laundering regulations and their implications for the property industry.

ORGANISED crime in the UK generates an estimated £24 billion of revenue each year – an impressive turnover even compared to some of the UK’s biggest corporate entities.

Unfortunately, just like the legitimate investment network some of these funds seek refuge in property.

The money laundering prevention process can sometimes be viewed as an inconvenience or frustration for property owners, purchasers and sellers. It should not be seen this way, it can be a simple process which protects all parties involved. Here’s why:

7 Walker Street, sold to a private investor for £1.27m.

attraction of city centre living and the number of buyers in this market. There has been a recent influx of foreign capital in the market, with the fall in the value of Sterling supporting this.

The trend is also evident throughout the wider Edinburgh market, with overseas buyers dominating and in 2016 accounting for almost 80% of all office investment transactions in the city.

The Edinburgh townhouse market offers investors a relatively secure option to invest in property with good income characteristics and long-term options; however, as with all investments it is not without pitfalls so considered professional market-driven advice is a must.

The investment team at Galbraith is very active within the Edinburgh townhouse market. To discuss townhouse buying and selling opportunities, please contact Jamie Thain (0131 240 6994) or Will Sandwell (0131 240 6997) in our commercial investment team.

jamie.addison-scott@galbraithgroup.com 0131 240 2287

New Money Laundering Regulations for the UK were passed by Parliament and came into effect on 26 June 2017.

While chartered surveyors and estate agents are not necessarily regulated by the Financial Conduct Authority, estate agents must be registered with HMRC and chartered surveyors are obliged by the Royal Institution of Chartered Surveyors (as a firm and individually) to follow mandatory rules of conduct.

These include statutory legal obligations under ‘The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017’ (MLR 2017). There are serious implications for professional advisors who don’t undertake customer due diligence.

The key changes are: • The move towards a risk-based approach for advisors will generally result in an increased level of diligence and understanding of client assets/ source of funds.

• Registration with HMRC for real estate businesses has been extended beyond estate agents, it will now include estate managers and agents acting as beneficial owners. Applications must be submitted before 26 June 2018. It will be illegal to act without registration.

• Advisors previously had a duty to undertake MLR checks on their own clients, whether buying or selling on their behalf. The theory being that the other side’s advisors would carry

out their own MLR checks. This still applies but selling agents must also MLR check purchasers. This will result in an additional request for personal information.

We welcome the new regulations as beneficial to all legitimate parties in the property industry – they shouldn’t be viewed as punitive. It’s unlikely that such regulations will become any more relaxed in the future so we offer the following recommendations for clients: • Don’t be frustrated or offended by requests for personal information or professional conversations about source of funds with your advisors. They are obliged to do this by law.

• Have an MLR pack ready for your own advisors, indeed ask them if your MLR file is up-todate. This might include certified copies of identification, certificate of incorporation and /or a copy of recent company accounts or bank records.

• Prepare an MLR pack for the agents on the opposite side of the transaction.

This might be less detailed and more focused around identification and records which are already in the public domain. If you are uncomfortable with this process, before issuing an MLR pack ask about the data management and security procedures of the recipients or consider issuing certificated hard copies.

• One brilliant element of MLR due diligence often overlooked is a faceto-face meeting with your agent/ advisor. As modern communication becomes ever more efficient, you might be surprised by the significant number of property transactions that take place without any real in-person interaction.

jamie.thain@galbraithgroup.com 0131 240 6994

will.sandwell@galbraithgroup.com 0131 240 6997

galbraithgroup.com | Commercial Matters Winter 2017-18 | Page 11

OUR EXPERTISE l Asset management l Building surveying l Commercial valuation l Facilities management l Investment consultancy l Professional services l Project co-ordination l Property management l Sales, lettings & acquisition In addition to our specialist services, we manage in excess of £450 million of commercial property across the UK. We deal with around 750 tenants in more than 120 properties from single units to large multi-let environments such as shopping centres.

CONTACTS Kash Bhatti Property management, facilities management 0131 240 6970 kash.bhatti@galbraithgroup.com George Bouwens Building surveying 0131 240 3031

george.bouwens@galbraithgroup.com

Martin Cassels Building surveying 0131 240 6992

martin.cassels@galbraithgroup.com

Nicola Charleston Planning, Professional & Valuation 0131 240 2968 nicola.charleston@galbraithgroup.com Jill Gayford Property management, asset management, professional & valuation 0131 240 6987 jill.gayford@galbraithgroup.com Katie Gibson Agency (office, retail & industrial) 0131 240 6981 katie.gibson@galbraithgroup.com Jamie Grant Planning 01786 434638​

jamie.grant@galbraithgroup.com

Pamela Gray Asset management, professional & valuation, property management 0131 240 6963 pamela.gray@galbraithgroup.com Richard Higgins Agency (investment, office, retail & industrial), asset management, professional & valuation 01786 434625 richard.higgins@galbraithgroup.com Calum Innes Agency (development & commercial), planning, project co-ordination, professional & valuation 01738 456075 calum.innes@galbraithgroup.com Pam Over Asset management, project development & co-ordination, property management 0131 240 6965 pam.over@galbraithgroup.com Will Sandwell Investment agency 0131 240 6997

will.sandwell@galbraithgroup.com

Peter Scott Aiton Building surveying 0131 240 6967

peter.scottaiton@galbraithgroup.com

Harry Stott Agency (development & commercial), planning, professional & valuation 01786 434630 harry.stott@galbraithgroup.com James Taylor Building surveying 01786 434610

james.taylor@galbraithgroup.com

Jamie Thain Investment agency 0131 240 6994

jamie.thain@galbraithgroup.com

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