Annual investment volumes in Scottish commercial property was well down in 2022 on pre-pandemic levels, according to new data.

Commercial property consultancy Knight Frank found that £1.66 billion-worth of deals concluded last year, marginally up on the £1.64bn recorded during 2021. But the market has some way to go to match 2019’s £2.02bn and the £2.46bn in 2018.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “Investors have had a lot to contend with this year, between the conflict in Ukraine, rampant inflation, interest rates rising, bond and stock market volatility, and political developments.

“Yet, despite all of that, Scotland’s commercial property market has continued its upward trajectory from the lows of the initial outbreak of the Covid-19 pandemic nearly three years ago.”

Overseas investors continued to account for the majority of deal activity, with a 52% share of investment volumes during 2022.

The purchase of 177 Bothwell Street in Glasgow by Spanish investment house Pontegadea was a record office transaction in Scotland, at more than £200 million. Property companies were by far the second most active buyers representing 35%.

Nearly £500m of offices were traded, followed by industrials, alternatives, and retail which accounted for around £300m each.

Glasgow saw the highest investment volumes of Scotland’s three largest cities at £468.54m. Meanwhile, Aberdeen saw £143.06m worth of deals – the highest amount since 2019, when there were transactions totalling £204.24m.

Mr Steele added: “There are always going to be challenges on the horizon, but after a particularly difficult period there are grounds for selective optimism for the year ahead. The cost of debt appears to be easing and there is still a deep pool of buyers looking at Scotland, and the wider UK, to invest.

“Aberdeen has been buoyed by the sustained high oil price, while the deal for 177 Bothwell Street underlines Glasgow’s attractiveness. Meanwhile, Edinburgh’s occupier market dynamics continue to bolster interest in the city.

“Yields in Scotland remain more attractive than many other parts of the UK and continental Europe, giving it an advantage.

“Liquidity issues are still a challenge for some funds, which will likely mean assets that are typically not on the market may become available for those in a position to buy. Similarly, cash purchasers are in a very strong position going into 2023.”

Conflicting retail data

The data, however, conflicts with figures from Co-Star Group which says it takes a wider look at the market.

According to its data investors poured over £450 million into retail properties in Glasgow alone last year (£303m according to the Knight Franks figures).

This is explained by differences in how and when the figures are compiled. Co-Star included the £140m Silverburn transaction last year when the deal completed, whereas it says this appeared in Knight Frank’s data for 2021 when the deal exchanged.

According to Co-Star, the investment in Glasgow is an eight-year high and would likely have been higher had it not been for rising interest rates and the government’s ill-fated mini Budget, which sent financial markets into meltdown and curtailed activity from September.

Robust investor appetite for retail warehouses, seen as a defensive play due to their often “essential” and omnichannel tenant mix, drove volumes before the autumn slowdown.

Realty Income’s acquisition of Great Western Retail Park in June was among the standout deals of the year. The £87 million purchase at a 6% yield underlined the strength of investor appetite for dominant retail warehouse parks.

Several smaller retail warehouse transactions also completed over the summer, including Supermarket Income REIT acquiring West End Retail Park for £34.5 million, or a 5.3% yield, and Savills Investment Management buying the Aldi and M&S-anchored Cumbernauld Retail Park for £24.5 million.

Earlier in the year, Fiera Real Estate purchased Atlas Retail Park for £11.3 million at a 5.2% yield, motivated by its “long, strong and progressive” index-linked income secured to discounter The Range and Connection Flooring.

Last year was also notable for a rise in sales on prime high streets, helped by softer pricing.

Buccleuch Property’s June purchase of 120 Buchanan Street from Aegon for £4.7 million at a 5.8% yield reflected a decade’s worth of income to jeweller Laings at a rebased rent from January 2023. A couple of months earlier, Ediston bought 123-129 Buchanan Street from Abrdn for £16 million at a 7.9% yield, ending a year-long sales drought on the city’s prime retail pitch.

Although investor appetite for shopping centres remains subdued overall, the biggest retail deal to complete in 2022 was Henderson Park and Eurofund’s acquisition of Silverburn from Hammerson and CPPIB. The sale at a 9.3% yield closed in the opening months of the year. The underperforming centre was acquired for its asset management potential and wide and relatively affluent catchment of nearly two million people.

Grant Lonsdale, director of market analytics at CoStar commented: “While transaction activity is likely to remain muted in the coming months as investors wait to see where interest rates settle and how the ongoing cost-of-living crisis pans out, Glasgow will likely remain near the top of retail investors’ shopping lists.”

He added: “The so-called Golden Z, and particularly the area around Argyle Street, is likely to be a key focus. Noteworthy lettings to Deichmann, H&M and Superdry have been agreed in recent months, while the City Centre Living Strategy, aimed at doubling central Glasgow’s population by 2035, is supporting a wave of build-to-rent development.”