SOVEREIGN WEALTH funds and other major investors have lined up multi-billion-pound funds to invest in the over-extended Scottish commercial property market when prices bottom out, the Sunday Herald has learned.

Groups which do not need bank loans, or already have debt facilities in place, are said to be ready to pounce if major developments are placed on the market by groups struggling to cope with debt in the wake of the downturn.

Those said to have already amassed substantial amounts include the Kuwaiti-backed investment group St Martins, along with Delancey, Mountgrange and Frogmore, all of which are based in London and in many cases have been sitting on their funds for many months. Major pension funds are also expected to show an interest.

David Hunter, a consultant at Glasgow-based Hunter Advisers, said: "I am very aware of significant accumulations of cash either from sovereign wealth that doesn't need debt, or multi-billion investment funds where the banking has already been secured but they haven't invested the money.

"As the market has fallen, it's been obvious that they should wait, but some are starting to look now. Delancey has raised a huge amount of money. Mountgrange are looking pan-European. Frogmore has raised a fund too. The big question is where the sellers are going to come from."

A separate market source said that St Martins was also waiting in the wings. It is backed by the Kuwait Investment Authority, the sovereign fund of the Kuwaiti royal family. One source said that other sovereign funds were also lining up, although Hunter thought that more were likely to take equity stakes in troubled property groups than invest in actual developments.

He added: "The more astute UK pension funds will also be looking very closely at the UK property market now, and they will be doing it on their own accounts."

Alan Robertson, the outgoing managing director of property services specialist Jones Lang LaSalle Scotland, said: "A lot of money is being put together. People who are not debt-reliant are waiting so that when commercial property becomes good value again, they will buy. We are not there yet but it's getting closer and closer."

Hunter said that while none of these huge investors would look at the Scottish market in isolation, the Scottish commercial developers were particularly at risk from becoming forced sellers due to their generally smaller size and the fact that many had expanded fast in recent years. The main Scottish developers include Edinburgh's Macdonald Estates, Miller Group, Kenmore and Kilmartin; Elphinstone of Glasgow and Aberdeen-based Stewart Milne.

The development comes after the Sunday Herald reported last week that banks were in some cases raising the price of corporate debt by between three and five percentage points when loans came up for renegotiation, with property companies among those facing the tightest squeeze.

Hunter said: "There are a lot of property companies who have grown up over the last five years with expensive bank debts. Unless they have been clever over the last year with their banking covenants, they are looking shaky."

Glasgow City Council became the latest casualty of the tough times last week when it announced that it had suspended plans to sell a selection of properties in the city worth £100 million because values and demand had fallen to levels that made it unviable.

Also last week, Edinburgh-based luxury homes developer Gregor Shore went into administration, costing 120 jobs and jeopardising its residential developments on Leith waterfront.

But while organisations face the squeeze, the opportunities for greater yields are increasing all the time for those with money. While it was common to get a 6% return on a commercial property investment a year ago, it is understood that returns of more like 8% are now viable, or even several percentage points more if rental values rise.

Completed developments with long tenancy agreements are seen as particularly attractive during the tight economic conditions.

David Melhuish, the director of the Scottish Property Federation, which represents commercial developers, said the Scottish market was awash with reports of funds being assembled.

He said: "Institutional investors can pool together funds that don't need to rely on banks. For developers that manage to get an institutional fund to invest up front, that's where you can still operate in the current market."

Both St Martins and Delancey declined to comment before this article went to press.