Scottish office leasing market on track for meeting targets in 2017

Scottish office leasing market on track for meeting targets in 2017
07/09/2017 , by , in INTERNATIONAL

Office leasing activity in Scotland’s major cities reached 1.4 million square feet in the first half of 2017, some 20% above the five year half year average, the latest research shows. The growth was boosted by accelerate leasing activity in Aberdeen and the strongest office take up ever recorded in Edinburgh while in Glasgow there is a shortage of Grade A office space.

The report from real estate firm Savills says that a robust leasing market is one of the factors that is leading the 25 to 50 basis points gap, which previously existed between office yields in Scotland’s investment market and the rest of the UK’s regional office markets, to show signs of closing.

Take up in Aberdeen during the first half of 2017 reached 238,000 square feet, already exceeding the 2016 full year level of 231,000 square feet. Savills says 78% of activity was accounted for by the engineering, extraction and utilities sector, up from 17% last year, as the city benefits from the increase in oil prices.

Leasing activity has seen office supply fall 3% from the end of 2016, however two million square feet remains available, notes Savills, and speculative developments expected to complete during the second half of 2017 will add to this.

In Edinburgh, the wider office market saw the strongest quarter of take up on record during the second quarter of 2017, which pushed the half year total to 772,000 square feet, some 50% above the five year first half average.

This was partly driven, according to Savills, by the GPU (Government Property Unit) signing a pre-let on 180,000 square feet of space at New Waverley, Edinburgh. Total city centre take up at half year reached 541,000 square feet, leaving only 313,000 square feet of space remaining, enough to cater for only one year’s worth of Grade A demand.

Leasing activity across Glasgow’s wider office market during the first half of 2017 reached 434,000 square feet, which the report states is in line with the five year half year average although a lack of Grade A options, now standing at just 473,000 square feet, is constricting activity.

The firm says 394,000 square feet of refurbished space currently underway will provide much needed Grade A space however a lack of speculative development will keep rents at £30 per square feet.

‘One year on from the European Union referendum, the Scottish office markets remain in good shape and we are well on track to meet our full year take-up forecasts,’ said Mike Barnes, research analyst for Scotland at Savills.

‘Leasing activity reflects the health kick seen across Scotland’s economy with 2017 first quarter figures showing growth of 0.8%, the strongest quarterly growth for two years and outperforming the UK average of 0.2%,’ he added.

The analysis attributes Scotland’s robust occupier market, and the weakening possibility of a second Scottish referendum, for boosting Scotland’s investment market as 2017 sees UK institutions make a return.

It points out that a shortage of on-market prime stock and a disparity in pricing between buyers and sellers has limited investment volumes to year date, which came to £227 million in the first half of 2017, some 19% below the 10 year first half year average. However, Savills expects competition for prime assets to intensify as the institutions compete with the overseas market in the second half of the year.

‘Investors’ improving sentiment towards Scotland relative to the rest of UK points to higher investment volumes and we are witnessing yield compression in certain segments of the market,’ said Rod Leslie, director in the investment team at Savills Scotland.

‘The 25 to 50 basis points yield gap which previously existed between Scottish office yields and the rest of the UK’s regional office markets is showing signs of closing and encouragingly we are seeing UK funds re-entering the fold,’ he added.

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