It is no secret that UK institutional investors have cooled on Scotland in recent years. Since 2013, their share of investment in Scottish commercial property has more than halved, falling from 41.5% to 19.7% last year. So far in 2024, they have accounted for 14% of investment volumes – but a catalyst to reverse that decline may be on the horizon.

Back in 2015, the UK government announced plans to reform how local authority pensions in England and Wales were managed. One of the main changes that came out of this process was ‘pooling’ the resources of the near 90 local government pension schemes, creating far fewer, but vastly larger, funds to increase investment in infrastructure, provide critical mass, and deliver cost savings.

The reforms created eight investment pools – including the ACCESS Pool and Border to Coast Pensions Partnership – with combined assets of around £375 billion. If you make the reasonable assumption of a 10% allocation to commercial property, that would mean potential inflows of around £37bn into markets across the UK in the years ahead.

Despite the changes, the pooled pension funds will likely retain largely the same mandates and aims and will have to invest significant amounts of capital in the UK economy in the coming years. Crucially, they will also have the advantage of casting off the restrictions that limited their smaller constituent funds and the type of assets they could bid on.

Broadly speaking, the individual funds that make up these pools have been net dis-investors in UK commercial property – not just Scotland – but many decided not to invest north of the border following the 2014 independence referendum because of perceived political risk.

Other buyers have picked up the mantle – particularly international and private investors. The former has accounted for more than 40% of investment volumes every year since 2014, with the exception of 2024 to date – partly a reflection of the fact that the origins of capital in Scottish commercial property are already beginning to diversify again. In fact, listed property companies and REITs have accounted for 31% so far this year – the highest level of any year in the data we have going back to 2002.

In all likelihood, these pooled funds will not take the same view towards Scotland that their smaller component parts did. They have greater scale and, therefore, can afford to build in slightly more risk – so, we expect them to take a measured view in terms of sector and geography. That being the case, they will likely begin underweight Scotland and will need to address that imbalance within their portfolios.

Although they have not started buying yet, the pools are expected to during the fourth quarter of 2024. This could translate into more deal activity later this year – these funds tend to have lower target returns than their private equity peers, which could make them more amenable to the types of deals being done in the current environment.

The timing also coincides with other pension-related developments – many defined-benefit pension schemes are reducing their direct exposure to property and, in doing so, are putting stock up for sale.

Meanwhile, the macro-economic backdrop is beginning to shift too. Interest rates heading in a downward direction is providing more stability for investors, with price expectations between buyers and sellers beginning to align much more than they did 12 months ago. The general election result has also provided more certainty over the UK’s policy direction – particularly compared to political developments in some of Europe’s other major markets.

The combination of more potential buyers, with the addition of these pension schemes; stock being made available; and a more supportive backdrop could help drive deal activity during late 2024. In recent years, we have seen a lot of what would have been considered institutional stock being bought by private equity or ultra-high-net-worth individuals. And, more buyers looking for high-quality, prime property usually translates into keener pricing.

Institutions have not been big buyers in Scotland for some time. But, in their new, collective form we could see them return in a meaningful way over the course of the next 18 months, making the potential pool of buyers for Scottish commercial property that bit deeper.

Alasdair Steele is head of Scotland commercial at Knight Frank