Lowest gap on record
New and refurbished office rents narrow
A severe shortage of new office development in Edinburgh means the difference in rent on refurbished offices is at its lowest on record.
According to Savills, refurbished property is expected to hit £32.50 per sq ft in the next quarter, just £1 per sq ft short of a new developments.
New grade A supply in Edinburgh stands at only 345,000 sq ft, enough to cater for only one year’s worth of demand.
Of only two speculative office developments currently under construction, M&G’s Quartermile 3 now has just 7,000 sq ft of the 73,000 sq ft building available following a letting to State Street (completing Q4 2017). GSS Development’s, 2 Semple Street (40,000 sq ft) will be available for occupation from Q2 2018. The Mints, where construction is due to begin, is rumoured to be pre-let prior to commencement.
By contrast Savills forecasts Edinburgh’s office take-up across all grades will reach 750,000 sq ft in 2017 as occupiers turn to refurbished options.
Savills says activity is driven by the city’s strongly performing professional, scientific and tech sector which is set to drive office based employment in Edinburgh to reach growth of 4% over the next five years, outpacing the Scottish average of 1.8%, according to Oxford Economics.
In addition, Savills is monitoring 580,000 sq ft of known lease expiries occurring between 2019 and 2021.
At the tail end of last year, rents on refurbished options had climbed to £30 per sq ft (Intergen at 81 George Street) and new refurbishments, including 1 St Andrew Square, recently launched by Standard Life Investments and attracting significant occupier interest, could see rents reach £32.50 per sq ft by Q3 2017.
Keith Dobson, director in the Scottish team at Savills, says: “Edinburgh’s office supply / demand imbalance is nothing new. However, the pressure on both has never been greater.
“Occupiers with upcoming lease events and those looking to expand in the city are facing a severe lack of options.
“Rents on refurbished offices are rising as a result and we are anticipating the market will see a number of pre-lets on the existing speculative developments as occupiers compete for the best space.”
Savills says the rising cost of refurbished office space will ultimately push rents on top offices in the city further, likely to reach £34 per sq ft by the end of 2017. This would place Edinburgh alongside Manchester as the most expensive office market outside of London and the south east.
Further fall in LBTT income
Official figures released by Revenue Scotland and analysed by the Scottish Property Federation (SPF) have shown a further fall in Land and Building Transaction Tax (LBTT) revenue.
May saw LBTT revenues £43.5m, which was £3.2m lower than April’s income. The major factor in this month’s decline is a drop in commercial property LBTT of a third from £17.9m in April to just £12.3m collected in May.
Residential property revenue has slightly increased compared to April (up from £19.3m to £20.7m). However, if replicated over the year these revenues would still leave the Scottish Government considerably short of the residential SDLT in Scotland in its final year where it returned £275m (2014-15).
The LBTT revenue is boosted considerably by the second homes 3% ‘slab tax’ (called the Additional Dwellings Supplement, or ADS for short) which by itself generated £10.5m in the month (up from £9.6m in April) and accounted for nearly a quarter of all LBTT revenue (£43.5m) in May.
David Melhuish, director of the Scottish Property Federation said: “The commercial property market is a factor of the wider economy.
“The drop to negative economic growth in recent months suggested a drop in commercial LBTT revenues was to be expected.
“However, losing a third of revenue is disappointing and suggests a commercial property sales market with weak activity currently. If this trend is not significantly reversed, then the commercial element of LBTT will again fall well short of expectations.
“Looking at the wider picture, it is significant that the newest LBTT tax, the Additional Dwelling Supplement, provided nearly a quarter of all LBTT revenue in May. The non-second homes residential market did produce slightly more LBTT than in April, but without the second homes slab tax, it would not be providing the growth in revenues expected by the government.
“If the 10% residential LBTT threshold could be raised to £500,000 from its current level of £325,000 we believe this would stimulate more activity as it would help transactions through alleviating the tax burden for this level of the market. More transactions at this level of the market would significantly boost not just the property markets and related economic activity, but also the government’s revenue.”