Scotland Property Quarterly Report
Industrials remain best performing sector
Quarterly returns for Scottish commercial real estate remained unchanged in the third quarter, holding at 2.4%, according to CBRE.
Returns and capital growth across all three sectors converged in Q3 and while industrials continued to outperform, posting a return of 2.5% during the quarter, retail and offices followed closely behind at 2.4% and 2.1% respectively.
Over the quarter, offices and industrials have both edged slightly lower since Q2 2015, whilst retail returns have improved, up from 1.9% in the last quarter. However, the bigger picture shows that over the past twelve months industrials has remained the strongest performer overall, with a total return of 15.2% versus 10.6% for offices and 8.5% for retail.
This recent improvement in retail performance not only means it is now performing on a par with other sectors in Scotland, it also means its returns are now similar to UK retail as a whole. Capital growth in particular has improved, up by 1.0% in Q3 compared to 0.4% in Q2.
Q3 saw offices posting its lowest quarterly return since Q2 2013 due to slower capital growth of 0.7%. Effectively flat yields over the quarter and low rental growth have also contributed to this moderate return for the sector.
Mirroring the offices sector, industrials’ capital growth rates have also slipped over the past six months. However, this sector is supported by much stronger rates of rental value growth which has helped to keep capital growth marginally ahead of offices.
At a city level, the variation in performance between the sectors is arguably as diverse as it has been at any time this decade. Aberdeen offices returns continue to slip lower as the full effect of low oil prices takes hold, although the retail and industrials sector in the North East both appear to be more resilient to these negative impacts.
In the west, returns improved in Glasgow for both offices and retail sectors during the quarter. Edinburgh has posted the strongest industrials results, with an annual total return of 21.5%, benefitting from a strong inward yield movement and strengthening rental growth to 4.5% over the year.
Campbell Docherty, senior director, CBRE (Scotland), said: “Investment activity during the first half of this year was significantly behind the pace set in 2014 but this has picked up thanks to a busy summer, which saw a number of high profile deals completed such as Eastgate Centre in Inverness, Atlantic Quay in Glasgow and Annan House, the new Aberdeen HQ for EnQuest.
“There are a number of larger investments in the market at present that if concluded by the end of the year are likely to show both office and retail sectors exceed or at least match their 2014 performances.
“Overall, the Scotland Property Quarterly report shows a fairly varied performance for Scottish real estate in Q3, with positive results coming from capital growth within retail, offset by lower rates within offices and industrials. However, industrials remains the strongest overall sector and the easing of total returns across all sectors does reflect a wider trend across the UK and is not confined to north of the border.”