Latest analysis from leading property consultancy CBRE shows that Scotland’s major office markets are now well into their second year of recovery. Nonetheless, it has been a mixed picture across the country with Edinburgh having a strong start to the year whilst Glasgow and Aberdeen have experienced a more modest first six months of 2014.
Across all markets in Scotland, take-up has increased, totalling 960,200 sq ft in the first half of 2014 compared with 791,800 in the first half of 2013. Given the previous few years have been characterised by more subdued market conditions, average performance for 2014 so far could be regarded as disappointing.
However, a number of markets have had a strong start to the year, notably Edinburgh. Both Q1 and Q2 saw robust activity in the capital, leading to a total of just under half a million square feet exchanging. This is 35% more than the long-term half yearly average and 9% more than H2 2013.
Demand has come from a variety of sectors although, unusually for Edinburgh, the largest proportion of take-up has come from the Technology, Media and Telecoms (TMT) sector with nearly 150,000 sq ft exchanging in this sector alone, accounting for 32% of total take-up in H1.
Total available supply has decreased 8% in the last six months to 2.26m sq ft in Edinburgh. Prime Grade A stock contracted the most, down 11% to 540,773 sq ft. This continued contraction is putting pressure on rents and it is anticipated that the next phase of speculative development will achieve rents in excess of £30.00 per sq ft.
It is predicted that the continued lack of available Grade A space will also give developers confidence to proceed with speculative developments within the Edinburgh market. The time lag of delivering new space to the market also points to a strong case for continued rental growth for the foreseeable future.
Total office investment transactions reached £118m in Edinburgh in the first half of 2014. This was a marginal decrease on the £129m that exchanged over the same period last year. It follows the busiest year for Edinburgh office investment since 2007 in which £333million transacted.
Activity in the second half of 2014 and beyond could continue to be influenced by the outcome of the Independence Referendum. A vote in favour of independence could see continued subdued transactional activity as investors reflect on the implications of Scottish Independence and issues, as yet unresolved, such as currency and EU membership.
Steven Hendry, director in the Capital Markets team, commented: “While some investors see interesting buying opportunities around the Referendum, we hope that after 18 September there will be less cause for investor uncertainty about the future. Interestingly though, it is now emerging that even a ‘no’ vote in September will not mean a return to the status quo. The three main pro-union parties have each outlined plans to increase devolved powers to Scotland, including greater fiscal control, in a post Referendum Union, similar to the Localism agenda now beginning to play out in England.”
In Glasgow take-up during the first quarter reached near-record levels as 193,516 sq ft exchanged in just the first three months. However take-up slowed through Q2 with only 74,270 sq ft of space transacted across 19 deals leading to a first half total of 267,786 sq ft. This is lower than anticipated as several deals which are nearing completion are taking longer than expected to conclude and will likely move into the third quarter.
Total available supply is now 2.36m sq ft, up from 2.06m sq ft six months ago. This increase is exclusively due to the three speculative office developments currently under construction: St Vincent Plaza, 1 West Regent Street and 110 Queen Street, which are due for completion in 2015. Collectively these buildings have added around 470,000 sq ft to overall supply. These new speculative developments are fuelling rental growth with prime rents now £28.50 per sq ft.
The momentum of strong investor sentiment evidenced through 2013 has not carried through to 2014 in the Glasgow office market. Whilst the first quarter was very quiet, the second quarter has been even more so, and although more product has come to the market during Q2, it is still well below historic trends. It is likely that the Scottish independence vote in September is having an effect, particularly where assets have exposure to a single tenant on shorter lease terms.
Audrey Dobson, senior director in Glasgow’s office agency team, said: “Occupier confidence remained strong during H1 2014 with the new speculative office developments being delivered in 2015 already enjoying pre-letting activity. The forthcoming Referendum coupled with the traditionally quieter summer period has caused some occupiers to press the pause button, however it is anticipated that Q4 will see renewed occupier demand.”
In Aberdeen a weak second quarter has led to below average take-up so far this year of 212,233 sq ft, 50% below the previous six months and 25% below the same period last year. During the second quarter there were no deals over 10,000 sq ft exchanged, which is quite unusual for the market as the long term trend suggests Aberdeen sees an average of four deals over 10,000 sq ft exchange each quarter. In the first quarter this year there were five deals over 10,000 sq ft with the largest going to Wood Group which took 58,490 sq ft at Nexen House in March.
Availability is now at 425,876 sq ft, with the majority of this being Grade B and C stock. There is just under 69,000 sq ft of available Grade A supply with the largest ready-to-occupy floorspace being just 17,925 sq ft at Union Plaza. Speculative development is starting to commence however with Dandara’s The Point (80,000 sq ft) and Knight Property Group’s The Capitol (74,000 sq ft), both city centre schemes, now on site and due to complete in 2015.
As a consequence of prime office supply finally coming to the market, there has been some rental growth in the Aberdeen office market, with prime rents moving from £31.50 per sq ft where they have been since 2011, to £32 per sq ft currently. This growth is set to continue through the year as prime stock is increasingly squeezed, with the potential to hit £33 by the end of this year.
The investment market momentum seen during 2013 carried through to the first quarter of 2014, but over the most recent three months this has tailed off as the vote on Scottish independence draws closer. Many funds are currently opting to play safe and holding back on investment until the outcome of the vote is clear. Total volumes transacted reached £108m across six deals so far this year.
Derren McRae, managing director of CBRE Aberdeen office, commented: “Whilst the level of take-up in H1 2014 has been somewhat lower than recent years, there is a significant amount of pre-let office deals under offer which are anticipated to convert in the second half of the year.”