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Scottish commercial property set for strong year

THE Scottish commercial property market is set for a surge in activity as pent-up demand from overseas and UK investors makes its way to market in 2022.

Commercial property experts in Glasgow and Edinburgh have hailed high-end opportunities with the return of the office and continuing benefit from warehousing and industrial sites driven by people changing habits and accelerated by the pandemic.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “It has been an interesting year. One of the big themes that has come through has been the resilience within the market.

“Everybody has found a way of working around the challenges of the current pandemic, which is good and will stand us in good stead going forward.”

He added: “There is clearly a huge weight of money that has been amassed and is waiting in the wings to invest into property.

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“We are starting to see that in a number of deals that have come about towards the end of this year.

“I think next year is going to be a very strong year for that reason and I think what we are going to see a continued polarisation of the market really where it is almost like mining for gold.

“You have this little thin strip of the market that is incredibly sought after by a lot of buyers and then once you move out of that it becomes a much quieter marketplace.”

Among the transactions in the Scottish capital, two prime sites in the city’s financial district were sold with long-term tenants intact, including 145 Morrison Street, which is entirely let to Capita until 2030, was acquired for £12 million by Topland and Exchange Place One was sold in an off-market deal.

Mr Steele said: “There continues to be strong demand from UK institutions for long secure income streams. There is lots of money seeking after that, that old story of industrial accommodation just continues to get stronger and stronger with the kind of change in people’s shopping habits that was accelerated by the whole Covid pandemic has continued apace and there is just an insatiable demand for industrial investments from UK and overseas investors and I think that is definitely going to continue.”

An industrial shed in Lanarkshire, let to the Swedish commercial vehicle manufacturer Scania, was sold for around £11m last month.

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“UK institutions for example are all driven by benchmarks so they tend to be relatively comfortable with buying what everyone else is buying, because they are judged against benchmarks and ratings but if you are a private equity investor you want to see value and it is very difficult to see value in the market where everyone else is trying to buy, so I think we’ll see some changes and I think one of the things that there could be a lot of interest an activity in is offices.

“Of course if you look at the pricing to the yields in those markets compared to a lot of Europe they are good value

“So I think there will continue to be a lot of overseas interest in offices in both Edinburgh and Glasgow next year,” said Mr Steele.

Glasgow’s largest single office block at 177 Bothwell Street is set for its official opening in January which comes with the entire building already let.

Its tenants include Transport Scotland, which is moving its headquarters there, AECOM, Virgin Money, and PNB Paribas, one of the world’s largest banking groups.

Stephen Lewis, managing director of HFD Property Group, said: “As I had predicted about March last year, whilst I expected the demand for office space to reduce by about 15-20% overall, that demand would be more acutely felt at the Grade B end of the space and it would be a flight to quality and that has been borne out.

“It is probably still a bit early to talk about whether it has been 15-20% in terms of overall reduction in take-up but there is definitely a flight to quality and that is borne out by the fact our building has let up so strongly during that pandemic.

“That is as much about wellness, sustainability, Covid proofing buildings, smart tech, all these things are what is driving occupiers.

“The question occupiers are asking is what do we need to do ton attract our staff back to the office, so it is creating spaces that staff want to attend.

“The wider take-up figures in Glasgow are pretty strong, buoyed by 177 but in general take-up is stronger than the market had predicted at the start of the year and that partly reflects the fact the economy has held up well, employment levels have held up well and productivity generally has been okay.”

He added: “Out of town in business parks, occupation is rebounding back to pre-Covid levels and again demand for quality space is there, flexibility in some cases.

“That is helped by those who want to look at not just public transport connectivity but also car-born and business that don’t have to be located in the city centre are often happy to take space in out of town business parks because that fits the model so that has held up and been resilient.”

By Brian Donnelly

Source: Herald Scotland

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Scottish commercial property investment volumes pick up during Q3

Investment volumes in Scottish commercial property staged a recovery between July and September 2020, buoyed by the best third quarter for office deals in five years, according to analysis from two separate reports.

Analysis from Knight Frank found that the COVID-19 pandemic saw investment levels drop to record lows in Q2 2020, following the introduction of lockdown restrictions and, subsequently, the attachment of material valuation uncertainty clauses to commercial property assets.

However, as the economy began to re-open a number of significant deals concluded between July and September, totalling around £400 million – just shy of the Q3 five-year average of £405m. Investment in offices during the three months hit £218m, against an average of £116m for the same period in the past half-decade.

The biggest deal of the quarter was Roebuck Asset Management and Hyundai Asset Management’s £133m acquisition of Aegon’s Edinburgh headquarters during July.

In Glasgow, there were several deals including Singapore-based Elite Partners Capital’s purchase of 150 Broomielaw for around £40m, while the Guildhall building on Queen Street changed hands for around £30m.

The third quarter also saw the completion of Scotland’s biggest-ever logistics property deal, with the acquisition of Amazon’s main Scottish fulfilment centre near Dunfermline by Knight Frank Investment Management, on behalf of a Korean investor.

Euan Kelly, capital markets partner at Knight Frank, said: “The deals that concluded in Q3 underline the trends we’ve seen take hold over the course of 2020 – a flight to quality assets in prime locations, let to strong covenants. The sale of the Amazon fulfilment centre in Dunfermline also highlights the growing appetite for industrial and logistics property that has emerged since the beginning of the COVID-19 pandemic.

“It is not all doom and gloom – however, the devil is very much in the detail behind the headline figures. If you have a multi-let industrial site, well-placed logistics shed, or a high-quality office building there will likely be a great deal of demand for that type of product. In that respect, property is reflecting what is happening elsewhere in the economy, with the strong getting stronger and vice versa.

“We are still in a continually evolving situation, but there are reasons for cautious optimism. The lifting of material valuation uncertainty clauses will help bring a level of certainty to the commercial property market – some deals cannot be financed when they are attached to an asset valuation – and there is a weight of money looking to be deployed in the right type of investments.

“In a world where there is little in the way of certainty, investors have an insatiable appetite for secure, long-term sources of income – and quality commercial property is in a great position to provide that.”

Meanwhile, a Q3 Scotland snapshot from Colliers International predicted a strong finish to 2020 for commercial property investment.

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Volumes in Q3 represented the highest quarterly figure in a year. While this was still almost 20% below the five-year quarterly average of £564m, Colliers said there is hope for a strong end to the year with pent-up demand driving activity.

Oliver Kolodseike, associate director, Research and Forecasting, at Colliers International, said: “It is positive to see that transactional volumes have started to pick up again and we are now expecting a strong end to the year in Scotland as we recover from the ‘COVID quarter’. An annual investment total of £1.5 billion across all sectors would be a positive result given the nationwide lockdown earlier in the year.”

Colliers’ analysis found that the office and alternative sectors accounted for three quarters of all activity by value, while investment volumes in the industrial sector were 40% above its five-year quarterly average. Unsurprisingly, given the ongoing impact of the pandemic, activity in the retail segment was limited.

There was a renewed interest in Scotland from Asia-Pac investors, accounting for over half of all investment volumes. This included the quarter’s largest deal which saw South Korean Hyundai Asset Management purchase 1-3 Lochside Crescent in Edinburgh for £133.25m. The 247,500 sq ft asset is currently let to insurance group Aegon. This is Hyundai Asset Management’s second Edinburgh purchase in less than 18 months, having already bought Gyle Square in April 2019 for £55m in one of Scotland’s other largest office deals that year.

Looking in more detail at investment in the office sector, performance was relatively strong in Q3 after no notable deals were recorded in the previous three months. A total of £186m was invested during Q3, only slightly weaker than the £196m transacted a year ago and marginally below the five-year quarterly average of £193m. In one of Scotland’s other largest office deals this year, Singaporean Elite Partners Capital bought 150 Broomielaw, the 97,000 sq ft building completely let to Scottish Enterprise, for £40m.

Industrial investment activity picked up during Q3, with volumes reaching £80m, 40% above the five-year quarterly average of £56m. The figure was boosted significantly by the sale of Amazon’s 1,023,000 sq ft logistics centre to Korean-based KB Securities for £66.8m, representing the second-largest industrial deal ever recorded in Scotland. In Glasgow, Stenprop acquired two separate units in Glasgow for a combined £10.7m. St Andrews Industrial Estate, covering 73,200 sq ft, sold for £5.5m, while Excelsior Industrial Estate, occupying 61,000 sq ft, went for £5.2m.

Patrick Ford, director, National Capital Markets, Colliers International in Glasgow, said: “It was good to see this relatively strong investment performance in the industrial sector in Scotland’s two biggest cities in Q3. Overseas investors, particularly those located in Asia, remain very interested in the Scottish industrial sector and large deals continue to be done, despite global economic uncertainty on the back of COVID.”

In Glasgow, the move to bring more residential properties back to the city centre continued. The third quarter’s largest deal saw Legal & General UK BTR forward funding an £81.5m mixed-use regeneration scheme in Candleriggs Square which will include 364 build-to-rent units.

Patrick Ford added: “There is a push towards a more mixed-use environment in city centres, particularly in Glasgow and this is reflected in the scale of investment in the city in Q3. This trend will be accelerated by the impact of COVID which is likely to see people work from home, at least part of the week, for the long term. This will change the nature of the office environment and the make-up of city centres.”

Oliver Kolodseike concluded: “In line with the wider global economy, Scotland’s GDP will take a substantial hit this year. The pace and magnitude of the economic recovery will depend on the lockdown exit strategy, the oil price trajectory and Brexit deal negotiations.”

By Euan Kelly

Source: Scottish Construction Now

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Demand for care homes to help fuel commercial property sector in 2020

High levels of demand across sectors including care homes, restaurants and pharmacies are set to drive activity in the Scottish commercial property market in Scotland this year, according to a new report.

The business outlook report from property adviser Christie & Co also predicted Edinburgh and Glasgow will continue to be the “focal points of growth in Scotland”.

Christie’s regional director, Brian Sheldon, said activity across many sectors slowed down towards the end of 2019 as political uncertainty led to a tailing-off of transactions. But he said there were now signs of a growing appetite for well-established and profitable businesses across the country.

The report said the Scottish care market has proved resilient despite ongoing staffing and funding challenges and vendors were taking advantage of the best sale prices seen by Christie in more than 12 years. The report predicts demand will be seen from a wide range of investors looking to grow and consolidate, including private equity buyers and real estate investment trusts.

Impending policy reform of early years care by the Scottish Government that will increase the number of funded childcare hours offered to all three and four-year-olds from August 2020 will also support demand in the nursery sector.

Premium assets

“In 2020 we may see a select number of premium quality assets coming to the Scottish market on a confidential basis, which will attract significant interest,” the report said.

Although 2019 started in a reasonably positive fashion for the hotels sector, Christie said a heightened sense of caution set in as ongoing Brexit negotiations weighed on confidence.

But the firm said it had multiple deals in the pipeline for 2020 and was already seeing a sense of “renewed positivity” in the market as funders in the sector become more comfortable with the political landscape.

Although 2019 was a difficult year for the pubs & restaurants sector in Scotland, Christie said restaurants with the right trading fundamentals are expected to thrive alongside the booming takeaway market.

“Scottish consumers spent £1 billion pounds on takeaway last year and the market is tipped to continue its growth trajectory via platforms such as Just Eat and Deliveroo,” it pointed out.

The report also said a surge in activity in the pharmacy sector was seen in 2019 and this year is expected to see a steady flow of businesses coming to market on the back of strong prices being achieved.

By Perry Gourley

Source: Scotsman

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Scottish commercial property market ‘shows resilience and growth’ in 2019

Scottish Property Federation (SPF) analysis of 2019 commercial property sales figures has revealed that the total value of sales grew in Scotland for the third consecutive year.

At £3.37 billion, the value of commercial property sales in 2019 hit its highest annual total since 2015. The total value of sales increased by £136m (4%) compared to the total for 2018.

The SPF’s analysis also shows that the number of commercial property transactions was the highest in the decade, standing at 4,667.

The number of commercial property transactions has increased every year since 2012, with 139 (3%) more sales taking place in 2019 than in the previous year.

Cities

Edinburgh continued to dominate the Scottish commercial property market. The capital recorded £1.01bn in commercial property sales during 2019, some £379m (60%) more than in 2018, and accounted for 30% of the Scottish commercial property market by value.

Glasgow also saw an increase in the total value of its commercial property sales. Scotland’s largest city saw total sales of £753m, some £229m (44%) higher than in 2018, and captured a 22% share of the Scottish commercial property market.

High Value Sales

Of the 4,667 commercial property transactions in Scotland during 2019, only 97 (2%) sold for over £5m. However, with a combined value of £1.75bn, these transactions accounted for more than half of the Scottish market by value. In total, 15 of Scotland’s 32 local authorities saw sales at this section of the market in 2019.

David Melhuish, director of the Scottish Property Federation, said: “We’re pleased to see the Scottish commercial property sales market continue to grow in what has been an uncertain time for the economy and businesses. We expect to see this resilience turn into stronger confidence in the commercial property markets during the course of 2020.

“Our analysis shows the strength of both Edinburgh and Glasgow, which between them accounted for more than half of the Scottish market in 2019 in value terms.

“Edinburgh has seen a particularly strong year with several high value transactions occurring in 2019, including the sale of Standard Life Aberdeen’s headquarters and M&G Real Estate’s acquisition of Exchange Plaza.

“Glasgow saw a number of high-value retail transactions by overseas investors, including assets at the Great Western Retail Park and the Sauchiehall Building in the city centre.”

Source: Scottish Construction Now

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Brexit impasse ‘impacting Scottish commercial property market’

THE Brexit impasse is contributing to perceptions that the commercial property market in Scotland is in the midst of a downturn.

The latest Royal Institution of Chartered Surveyors commercial property market survey has found anecdotal evidence suggesting that the process to leave the European Union is having an increasingly detrimental impact on market activity, with inquiries from potential investors in the third quarter lower than during the previous three months.

The latest results show that half of respondents in Scotland sense the overall market is in the downturn phase.

The highest proportion of respondents in Scotland since 2016 in the investment market said that inquiries from potential investors were lower than in the previous quarter.

The net balance for overall investment inquiries in Scotland during the period was -34%, meaning that 34% more respondents said that investment inquiries fell than said they rose.

The retail sector continues to drive the overall decline, with the weakest reading since 2008, showing a net balance of -70%, which is the weakest across the UK.

Demand for office and industrial space in Scotland was reported to be broadly flat.

Interest in investing in retail was the weakest according to respondents, but investment inquiries were also reported to have fallen in the industrial, where there wasa net balance of -14%, and office, where it was a net balance of -20%, sectors.

In the occupier market, tenant demand reportedly fell at the headline level in Scotland for the fourth consecutive quarter, with the net balance slipping to -22%, from -3% previously, RICS said.

Scottish surveyors are cautious looking ahead about rents in over the next quarter. The overall net balance for three-month rental expectations is its weakest since the second quarter in 2016 at -23%.

However, this is driven by pessimism regarding retail rents, with a net balance of -65%. Expectations for office and industrial rents are broadly flat.

RICS said Scottish respondents are more positive about the value of industrial and office property, with the balance of respondents pointing to modest growth in capital values in both sectors in the near term.

Richard Smith, of Allied Surveyors in Inverness, said: “The market over the last three months has been affected by political uncertainty. Clients tell us that they will invest when the uncertainty is removed, regardless of how that is achieved.”

David Castles, of Ian Philp Glasgow, said: “Office and industrial sector capital values will improve but supply of prime office developments is restricted, and more investment is required which hopefully will improve once market uncertainty is reduced.”

Tarrant Parsons, RICS economist, said: “Although half of respondents in Scotland now perceive the market to be in a downturn, the fact that capital value expectations are still positive suggests a relatively soft landing for the commercial real estate sector is anticipated overall.”

Meanwhile, research from Grant Property has shown investors from South East Asia are cashing in on the opportunities provided by a drop in the value of the British pound and increasing yields and rents in the UK buy-to-let market, especially with student flats.

The firm reported a surge of interest from Hong Kong and Singapore as new and existing investors are purchasing more buy-to-let properties to add to their portfolios. An increase in rents as high as 15% over the last 12 months alone, combined with steady long-term capital growth on average 7% per annum, are factors which are making UK property an appealing investment prospect, it said.

Peter Grant, founder of Grant Property, said: “In the last year we have sold over £38 million worth of properties to overseas investors and we are currently dealing with 25% more enquiries than this time last year.

“Investors see the uncertainty of Brexit as an advantage and are capitalising on the opportunity to snap up traditional flats in UK cities, particularly where there is a student population.”

By Brian Donnelly

Source: Herald Scotland

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Sharp fall in Scottish commercial property market

An analysis of commercial property sales during the first quarter of 2019 from the Scottish Property Federation (SPF) claims that total the value of sales in Scotland fell by 21 per cent compared to the same period in 2018. The drop in value was largely driven by fewer high-value transactions for this period, with the number of £5m+ sales down by nearly one-third compared to Q1 2018.

The SPF analysis shows a 21 per cent (£203m) year-on-year decrease in sales by value in Q1 2019, with the value of commercial property sales in the quarter totalling £763m. The SPF also reported £3.03bn in property sales across Scotland for the last four quarters, the lowest rolling annual total since Q2 2014.

Property data experts at CoStar reported a similar decrease in investment in Scotland in Q1 2019. Investment volumes fell compared to Q4 2018 and Q1 2018 by 41 per cent and 54 per cent, respectively. CoStar points to investment into alternative assets as the key driver of activity in Q1 2019, with below average investment into Scotland’s industrial and office sectors.

Edinburgh bucks the trend

Edinburgh showed a break from the national trend in Q1 2019, with higher values than the same quarter in 2018. The Capital recorded a total value of £264m in commercial property sales, accounting for 35 per cent of the total value of commercial property sales in Scotland.

Aberdeen also saw commercial property sales recover against the previous quarter, with an increase from £14m to £41m. However, year-on-year, the total value of Aberdeen’s sales fell sharply by £125m.

Glasgow experienced a decrease in the total value of sales by £26m (15 per cent) from the previous quarter but rose by £49m on Q1 2018. Nineteen per cent of the total value of Scotland’s commercial property sales in Q1 2019 occurred in Glasgow, totalling £171m.

David Melhuish, Director of the SPF, commented: “The sales report for Q1 2019 shows a clear fall in total value of commercial property sales compared to the previous year. This aligns with investment data suggesting a subdued start to 2019 for the Scottish commercial property sector.

“However, the sales data does underline the current strength of Edinburgh’s commercial property market, with the Capital accounting for 35 per cent of the Scottish market by value. The investment data also highlights the rise in investor appetite for alternative property asset classes, such as hotels and build-to-rent. For investors, Edinburgh remains a hotspot, while more broadly, low growth and lack of certainty in the economy is weighing down on activity.”

By Neil Franklin

Source: Workplace Insight

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Scottish commercial property market outperforms UK in several sectors

SCOTLAND’S offices, retail and alternatives property markets all significantly outperformed the UK markets in 2018, according to data released by leading property consultant CBRE yesterday.

Their research revealed that the annual Scottish all commercial property total return for 2018 was 5.6%, only slightly lower than the UK all property return of 6%.

Industrials in Scotland also had a strong end to the year, achieving the highest return of the three main sectors.

Office and industrials returns in Scotland have increased year on year, with offices achieving 8.2% compared to 5.9% in 2017, with industrials increasing from 7.9% to 8.6%.

Offices were 2% ahead of the UK figure of 6.2%, while retail returned 4.7% compared to the overall UK figure of minus 1.1%.

Alternatives continued to be the best performing sector in Scotland, and the only one to achieve double-digit returns in 2018, with 10.6% compared to the UK’s 7.5%.

CBRE said that given the current challenges facing the retail sector, it is unsurprising that at year end the outlook remained subdued.

Compared with performance for the whole of the UK, Scottish returns have been more resilient in the final quarter of 2018. At the all property level, the picture is very similar –with UK returns down by almost 1.5% and Scottish returns unchanged.

During the last quarter of the year, £642 million of stock was transacted in Scotland, demonstrating a strong final quarter, and bringing the annual total to £2.49 billion in 2018. This is broadly in line with the £2.5bn achieved in 2017.

The retail sector total was boosted by the controversial sale of Fort Kinnaird Retail Park, located on the eastern edge of Edinburgh, which was acquired from The Crown Estate by M&G Real Estate for £167.25 million, with none of that sum accruing to the Scottish Government despite the Crown Estate being devolved.

David Reid, associate director of CBRE, said: “It’s great to see the industrial and logistics sector in Scotland performing strongly again during 2018 with sharpening yields and increasing rental and land values within prime locations.

“With this backdrop we are seeing increasing developer appetite for speculative schemes and there are a number of occupier pre-lets on the horizon during 2019.”

By Martin Hannan

Source: The National

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‘Encouraging’ 2017 results for Scottish commercial property market

SCOTLAND’S commercial property market showed an “encouraging” six per cent annual total return in 2017.

Data from property consultant CBRE reveals the total 2017 return for Scotland was 6.8 per cent, comparing favourably with the UK’s 10.2 per cent.

Measured by the IPD Quarterly Index, the research found over the fourth quarter, the total property return was 2.1 per cent, up from 1.7 per cent in quarter three. This increase is attributed to improved capital growth, with average capital values up by 0.6 per cent. This represented the bulk of capital appreciation during the year, given the total uplift in 2017 was just 0.9 per cent over the calendar year.

Industrials have been the key differentiating factor in the UK’s relative outperformance against Scotland, with the pace of rental growth in the London and South East industrial markets notably outperforming rental growth in any other commercial real estate sector. However, for some other sectors, the performance gap between the UK and Scotland has narrowed, notably high-street shops and offices.

Office sector total returns for Q4 rose to 2.2 per cent, an increase from 1.6 per cent in Q3, representing the largest quarterly uplift in returns for any of the three principal sectors in Scotland. It was also the highest total return for the Scottish office sector since the final quarter of 2015. This led to an annual total return of 5.9 per cent in 2017, in contrast to -0.2 per cent in 2016. Despite capital value growth throughout the second half, it was not quite enough to reverse the loss incurred in the first half which felt the effects of Brexit.

Total returns in retail saw a slight increase from 1.4 per cent in Q3 to 1.5 per cent in Q4, while the UK-wide figure saw a marginal slip. The annual total return for retail in 2017 was 5.8 per cent, a marked improvement on the one per cent return achieved in 2016. Over the course of the past twelve months, capital growth for Scottish retail has been virtually flat, despite average rental growth on 0.5 per cent over the year.

Once again, industrials were the best performing of the three main sector groups in 2017, producing a total return of 7.9 per cent during the year compared to 4.3 per cent achieved in 2016. Industrials were the only sector to experience substantive capital growth in 2017, with values increasing by 5.5 per cent on average, and rental value up by one per cent over the same period. Like other sectors, growth rates improved during the course of the year. Capital values were up two per cent alone in Q4, leading a quarterly total return of 2.5 per cent.

The industrial markets in Glasgow (14.2 per cent) and Edinburgh (11.6 per cent) were the only two city groupings to achieve double-digit returns in 2017. The market in Aberdeen continues to lag significantly behind the central belt cities, but at 2.8 per cent the industrial sector is now producing positive returns. Aberdeen’s other two sectors remain weak, with the retail sector just slipping into negative returns once again.

Steven Newlands, an executive director at CBRE, said: “These results are encouraging for the investment market in Scotland, where sentiment improved following the general election result last year, which reduced, in investors’ eyes, the likelihood of a second independence referendum.

“It should be noted that Scottish property continues to offer good value to investors and is trading at a discount comparable to properties south of the border.”

Source: The National