Investors move in after referendum

Post-referendum optimism drives property deals to decade high

DTZ StrathCommercial property deals in Scotland last year reached their highest level since 2006 and were three times higher than in 2012 as investors and developers returned to the market after the referendum vote, according to DTZ.

Transaction levels were around £2.85 billion in 2014 while UK commercial property investment reached an all-time high of £56.2bn.

Stuart Spalding, Director, Investment agency at DTZ in Scotland, said: “There are many reasons to be positive about the outlook for the Scottish commercial property investment market in 2015.”

“Occupational and investment activity has picked up across the Glasgow and Edinburgh office markets following the pause in the market last year as everyone waited to see the outcome of the referendum.”

Prime office yields held at 5.5% for both cities throughout 2014, whilst yields tightened in the other ‘Big 6’ by between 25 and 75 basis points.

“We expect yields in Glasgow and Edinburgh to harden to between 5.25% and 5% in 2015,” he said.

“Aberdeen made a strong contribution to the commercial property investment turnover for Scotland in 2014. The current fall in the oil price will likely result in a lower contribution from the city in 2015 unless there is a higher than expected short term recovery in the oil price.”

Stuart Spalding
Stuart Spalding

Mr Spalding said firms have been putting strategies into action that had been on hold in the run-up to the independence referendum last September.

But the increase in demand for offices has put a squeeze on available supply, with some concern that there is a shortage of Grade A space to meet occupier demand despite some speculative development in both Glasgow and Edinburgh.

The shortage of supply was being exacerbated by the trend to convert Grade B stock to alternative use such as student accommodation and hotels reducing the potential options for office refurbishments to provide good grade B alternatives to the grade A stock.

“Retail has had a difficult time of it in the recession, though the strengthening economy and increased consumer spending will ensure Scottish retail continues to be a sector of interest for investors, particularly prime assets,” said Mr Spalding.

He said the industrial market in Scotland “is as good as it has been for decades” and a lack of prime stock is creating “an optimism that we are set for a new period of development”.

National trade counter occupiers are returning to the market, internet shopping is creating demand for logistics and modern manufacturing and engineering require high specified buildings, he said.

“As the UK commercial property market recovers, and with a weight of money focusing on the regions, we expect yields to move inwards through 2015, particularly for offices.  Across the sectors investors are likely to begin to look further up the risk curve, and the yield gap between primary and secondary assets will continue to narrow.”

Ben Clarke, Head of UK Research at DTZ said the UK regions have been an attractive option, given the higher yields on offer than in London.

Mr Clarke said: “DTZ has tracked an upward trend of new global capital targeting the UK for the year ahead, reaching £28bn in 2014. Inflows to retail funds also remain strong, so we expect downward yield momentum to continue into 2015, with secondary continuing to move in faster than prime.

“However, as pricing in the UK gets ever keener, some of this capital could be diverted to Europe, where there is more opportunistic investment for distressed assets.”

Looking ahead, DTZ downplayed some perceived risks to UK property markets, including the impact of the general election and volatility in energy prices. It said a possible EU referendum may lead to a significant pause in investment and occupier market activity in the lead up to any vote but this would not be for several years.

It believes the most important issue impacting property remains the ongoing ultra-low interest rate environment that has almost certainly been prolonged into 2016 with the release of record low inflation figures. DTZ says this is especially relevant since it expects more UK property markets to be overvalued than undervalued by early 2015.

Mr Clarke said: “The longer the yield spread between property and bonds is, and is expected to be favourable, the further property yields will be compressed. The UK all-property total return for 2015 is set to again be a double digit, though we expect it to fall short of 2014’s near-20% return. However, front-loading returns in this way comes at the cost of a more sharper correction to commercial property down the line when the interest rate environment eventually normalises.”

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