Deal activity surges in two main cities

Office demand in capital ‘at highest for 12 years’

TanfieldTake-up of Edinburgh office space could approach levels last seen 12 years ago if current trends continue, according to new research from Knight Frank, the real estate consultancy.

Deal activity surged in Edinburgh during the first half of this year, while investment in Glasgow reached £128 million; almost double the levels seen during the same period last year.

The firm’s twice-yearly research found there was outstanding demand for 560,000 sq ft of occupier requirements in the city centre of Glasgow – the highest for 10 years.

In Edinburgh, Knight Frank suggests take-up of office space could rise on last year’s 740,000 sq ft, which was the highest for a decade. Investment volumes in the capital reached £149m for the first half of the year as institutional investors moved to take advantage of the growing demand.

Requirements for office space in Glasgow were largely driven by the engineering and financial sectors, representing 50% of total activity, while in Edinburgh technology, media and telecoms (TMT) and professional services accounted for 48% of total take-up in H1 2015.

Alasdair Steele, partner and Knight Frank’s Edinburgh Office head, said: “Confidence, investment and take-up are high in the Edinburgh market. Our forecasts suggest 2015 could have the highest amount of office space committed since 2003. Investment has also begun to rise again; up 26% on H2 2014.

“This surge in activity is clearly having an effect on the level of Grade A supply; new office stock in the city is at its lowest in nearly three years. As a result, potential occupiers could struggle to find new office premises in Edinburgh city centre.

“Given the strictly limited development pipeline we expect this to continue and prime rents could rise above £30 per sa ft by the end of the year.

“Edinburgh offices performed strongly in 2014, with rents rising and yields hardening and we anticipate that both of these trends will continue over the next twelve months.”

Investment in Edinburgh was largely driven by UK institutions, which have seen the capital as a source of superior yields and value for assets compared to other regional cities. The largest deal in the city saw the Rockspring UK Value Fund purchase 1 Tanfield in an agreement worth £56m, reflecting a net initial yield of 6.5%.

Glasgow’s biggest deal was the purchase of 120 Bothwell Street by M&G Real Estate from C S Euroreal for £72.4m, with a net initial yield of 6.2%. In another notable transaction, the Ambassador Group acquired 31 Stockwell Street from Fortress Investment Group for £26m, with a net initial yield of 8.2%.

John Rae, partner and Knight Frank’s Glasgow Office head, said: “The outlook for Glasgow is undoubtedly positive – particularly from an investor perspective. Yields are now at an average of 5.5% and given the level of demand for prime office space, many will see it as an opportunity to achieve strong returns and sustained performance.

“The Glasgow market is split into two tiers. On one side you have huge demand for Grade A space with diminishing supply – although there are projects underway to relieve that pressure. On the other, there’s an oversupply of Grade B space; some of which requires significant refurbishment.

“This combination of factors could see the rents for Grade A office space come under pressure as demand continues to rise, reaching £30 per sq ft by the end of the year.”

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