Improving property market but development sector struggling to respond

Nov. 8, 2010 - PRLog -- Demand for office property has edged upwards during 2010 and the smaller end of the industrial market is performing well but Scotland’s broken development sector is largely unable to respond to the opportunities that are emerging.  The focus for the investment market remains at the prime end.  These are the main findings in Ryden’s latest Scottish Property Review, an authoritative report on the commercial property sector.

Economy

Economic growth in Scotland stalled at the start of 2010.  Recovery is expected to continue but only modest levels of growth are forecast.  Cuts to the public sector announced in the Comprehensive Spending Review have yet to translate into the property sector but will affect demand.

Offices

Sharp contrasts exist in the office markets within Scottish cities:

The Glasgow offices market remains resilient and is performing well compared with comparator cities.  The main feature of the market is the lack of new development as current supply of Grade A and B, refurbished and quality second hand space is further eroded.  Take up in the last six months is up by 75% on the previous six month period to 42,405 sq. m.  A peak of £305 per sq. m has been achieved for prime office rents and may still be achieved for Grade A space, which is limited.  It’s anticipated that reducing supply over the next 6-12 months will drive incentives down.

In Edinburgh, take-up over the last 12 months was 65,951 sq. m, 15% below the 10-year average.  Unlike Glasgow, which has seen some large deals take place, Edinburgh’s market remains focused on smaller deals.  Prime office rents sit at £290 ser sq. m. There is downward pressure on city centre rents, particularly for Grade B properties and incentives are a significant feature in the Grade A market.  Rather than relocate, many companies in the Capital are still seeking to re-gear at lease expiries or to delay their move until the economic outlook improves.

Although still below the 10-year average, take-up has risen by 13% in Aberdeen’s office market. Rents are stable, with incentives remaining constant because the city is not suffering from oversupply.  In fact, a severe undersupply could occur if the oil industry continues to strengthen and some current office requirements come to fruition.

Industrial

Demand in the industrial market has become polarised over the past six months.  Demand and take up for smaller premises below 929 sq. m continues at encouraging levels but there is a decline in the number of new active requirements and few notable transactions above this size.

85% of take up in Glasgow has been of properties below 929 sq. m.  Fortunately, very promising larger requirements exist and it is hoped that the next six months will see greater activity involving medium to large properties. Despite occupiers pushing landlords for improved terms or greater flexibility on leases, rents and incentives are holding up.  There is a shortage of properties within better locations and signs emerging of developer interest to fill this gap but in addition to funding constraints, there is a lack of suitably priced land to support development.


Edinburgh has a shortage of good quality industrial space which is set against a backdrop of reasonable occupier demand, particularly for smaller units.

Aberdeen has experienced a challenging six months, with a 26% decline in floorspace take-up and overall transactions are down by 39%.  Industrial supply for properties larger than 1,858 sq. m has increased, leading to a 161% rise in take-up.  Rental levels in Aberdeen have been maintained at £91.50 per sq. m for warehouse space and £183 per sq. m for offices.  Yardage is around £16 per sq. m.  Speculative development is underway, providing evidence that there is confidence that the occupational market will improve.

Retail

Occupier demand for retail premises throughout Scotland remains subdued and development activity is curtailed by the lack of debt finance available in the property market.  Consumer confidence in Scotland is lower than across the rest of the UK due to concerns about public sector job cuts and this is translating into spending.

Glasgow’s city centre has seen some recent activity, with deals involving Lipsy, Mango, Jones Bootmaker and Jack Wills.  

In Edinburgh, plans are progressing for the proposed redevelopment in St James Shopping Centre, and retailer Primark has commenced on-site on Princes Street.  

Aberdeen’s economy has proved positive for retail, where activity is strong.  Gio-Goi, Jones Bootmaker and Sony Centres have all taken space at the new Union Square.

Investment

Scottish commercial property recorded a total return of 22.4% to June 2010, a complete turnaround from the previous year which recorded a total return of -25.3%.

Yield improvement has been the principal reason for the turnaround and has more than compensated for the negative rental growth across all three sectors.  Capital growth has eased but the decline in rental values has, encouragingly, slowed.

Transactional activity has continued to focus on prime markets and there is considerable interest in well-secured, long-let investments especially if there are geared rental uplifts.

The property investment market has consolidated in recent months and this is set to continue.  Prospects for yield improvement are limited to certain sub-sectors but there are signs that rental value decline is slowing as the economy begins to recover and due to a lack of new development.  Competition for secondary assets remains hampered by the lack of active lenders but attitudes to risk are evolving and there are early signs that investors may consider more speculative situations.

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Notes to Editors

Ryden thanks Scottish Property Network and the Investment Property Databank for their assistance.

Ryden is an independent commercial property firm operating a full-service practice.  Service lines include Agency & Development, Investment & Finance, Professional, Building Consultancy, Property Management and Consulting.

The firm, headed by Fiona Morton, Managing Partner, has around 140 staff, including 30 partners and 19 associates.

Ryden has offices in Edinburgh, Glasgow, Aberdeen, Leeds, Dundee and Inverness.  

Some recent awards include:
•   Property Week’s Industrial Agency Team of the Year (Scotland) 2009
•   EGi’s Most Active Agent in Scotland 2009
•   EGi’s Most Active Industrial & Distribution Agent in Scotland 2009
•   EGi’s Most Active Office Agent in Scotland 2009

For more information see www.ryden.co.uk

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Ryden is the largest independent commercial property consultancy in Scotland and the North of England. We have 33 Partners and over 140 staff across six offices in Edinburgh, Glasgow, Aberdeen, Leeds, Dundee and Inverness.