Third quarter data for Scottish commercial real estate revealed a notable increase for annual total returns, which rose from 2.1% in Q2 to 6.1% in Q3, according to leading property consultant CBRE.
The rise can be attributed to a combination of improved performance during the quarter plus the large fall in values resulting from last year’s EU referendum no longer forming part of the annual performance data.
Quarterly returns also improved in Q3, with a Scottish all property total return of 1.7%, compared to 1.4% in Q2 2017.
Steady performance in Scotland’s retail sector resulted in a Q3 annual total return of 5.7%, however, these returns have been exclusively driven by income return, with capital value unchanged, on average, over the course of the past twelve months. Rental values are up by 1.0% over the twelve months, but this has largely been cancelled out by yield shift in the sector.
The office sector continues to be the overall weakest performer over the past twelve months, with a total return of 4.8%, and rental values dipping by -2.6%. Nevertheless, quarterly total returns for offices were 1.6%, a marked increase from 0.8% in Q2. Performance in Scotland’s largest cities continued to buck the national trend, with annual total returns reaching 8.9% in Glasgow and 7.4% in Edinburgh.
Industrials is the only sector where the performance gap between Scotland and England has not narrowed, with superior performance in South East England pushing annual UK returns to 16.8%, compared to 6.8% for Scotland. That said, quarterly returns remain robust, with a total return of 2.2% over the course of Q3, up from 1.8% in Q2.
The improvement in performance over the past quarter is echoed in the city level data, albeit the overall hierarchy remains similar to previous quarters. All markets have seen annual total returns improve significantly, with the reappearance of double-digit returns in the Edinburgh and Glasgow industrial markets at 10.3% and 12% respectively. The only sector remaining in negative territory was the Aberdeen office market, but at -0.5%, it represents a significant progression from the -4.7% annual return recorded at the end of Q2.
In terms of investment, the third quarter saw some of the largest transactions of the year to date. A total of £502m of stock was purchased, bringing the total investment volumes for the year to £1.31bn, with one quarter to go. However overall investment volumes in the first three quarters of 2017 have amounted to just over 50% of the full year totals in 2015 and 2016 and Scotland will require a strong final quarter to repeat the investment volumes achieved in the previous two years.
Aileen Knox, senior director at CBRE, commented on the findings: “This is the first full quarter where the value drop resulting from the EU referendum is not included within the performance data for the previous twelve month period, something which is evident from the notable rise in the annual returns figures. It’s reassuring to see this improvement reflected across all sectors and cities, with Aberdeen beginning to show signs of recovery following a weak couple of years.”