Two countries divided by real estate policies

Scotland is a compelling destination for real estate investment, but various challenges have hampered its potential. Conversely, despite rising prices and cost inflation, England and particularly London and the south-east, continue to attract domestic and international investors.

Property taxation is one of the most marked differences. Scotland adopted Land and Buildings Transaction Tax (LBTT) while Stamp Duty Land Tax (SDLT) remains applicable in England. Fundamentally, LBTT is designed to be more progressive but higher tax rates for more expensive properties arguably deters investment in what is a critical segment for market vitality. It has also driven higher average tax rates in the commercial property sector in Scotland.

In contrast, SDLT in England has seen a series of adjustments intended to stimulate the housing market, which have helped to sustain market activity, particularly in challenging economic times.

Government policy also has significant influence. Recent policy changes by the UK government - including measures to accelerate the planning process, reduce bureaucratic hurdles and enable quicker commencement of construction projects - are designed to stimulate growth.

A further measure has been a significant increase in funding for affordable housing projects, addressing the chronic short-fall in housing stock for lower-income families. The UK government has also incentivised developers to incorporate sustainable practices in projects, with tax breaks for environmentally friendly construction projects. Furthermore, community-led housing initiatives aim to empower local communities to develop housing solutions that fit their specific needs, while investment in urban regeneration programmes aims to revitalise neglected and underdeveloped areas.

Conversely, in Scotland, systemic issues continue, with a housing crisis characterised by a shortage of affordable homes and rising homelessness. Recent regulatory controls like the ‘rent freeze’ have impacted on levels of private investment in the housing sector and arguably further exacerbated the problem. Recent proposed changes to include Purpose Built Student Accommodation (PBSA) within the sectors covered by the proposed Housing (Scotland) Bill will affect that sector in the same way the rent freeze all but killed Scotland’s Build-to-Rent sector.

Whilst the Scottish Government’s aim to increase housing supply and investment in social housing is ongoing (and a key part of the recently announced Programme for Government), we urgently need a more streamlined planning process - with simplified planning regulations and clear, consistent policy frameworks to help attract private investment in the sector. We need less regulatory controls to attract investment and increase stock in the private rental sector. Proper consultation with the investment and development industry is essential to understand the massive impact such regulation can have.

Real estate investment is crucial for economic growth. Enhanced support for private investment and targeted tax incentives are key to attracting investment and in turn will drive employment and stimulate local economies.

Without question, maintaining investor confidence through stable and predictable policies is critical.

Whilst both Scotland and England face distinct challenges in their respective real estate markets, UK Government policy initiatives in England specifically targeted at the real estate sector could yet offer invaluable insight.

Strategic policy interventions, investor-friendly taxation and a focus on sustainable development can unlock substantial growth and investment opportunities and might help Scotland revitalise its own real estate sector, solve the housing crisis and deliver on a wider growth agenda.

Barry McKeown is head of real estate in Scotland, Shoosmiths​