According to the latest Scottish Office Market Spotlight from Savills, leasing activity for the first half of 2017 across Aberdeen, Edinburgh and Glasgow reached 1.4 million sq ft, 20% above the five year half year average, boosted by accelerated leasing activity in Aberdeen and the strongest office take-up ever recorded in Edinburgh.
A robust leasing market is one of the factors that is leading the 25-50 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, says the firm.
Take up in Aberdeen during the first half of 2017 reached 238,000 sq ft, already exceeding the 2016 full year level (231,000 sq ft). 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 2 million sq ft 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 Q2 2017, which pushed the half year total to 772,000 sq ft, 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 sq ft of space at New Waverley, Edinburgh. Total city centre take up at half year reached 541,000 sq ft, leaving only 313,000 sq ft 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 sq ft, 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 sq ft, is constricting activity. The firm says 394,000 sq ft of refurbished space currently underway will provide much needed Grade A space however a lack of speculative development will keep rents at £30 per sq ft.
Mike Barnes, research analyst for Scotland at Savills, comments: “One year on from the EU referendum, the Scottish office markets remain in good shape and we are well on track to meet our full year take-up forecasts. Leasing activity reflects the health kick seen across Scotland’s economy with Q1 2017 figures showing growth of 0.8%, the strongest quarterly growth for two years and outperforming the UK average of 0.2%.”
The Spotlight 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. A shortage of on-market prime stock and a disparity in pricing between buyers and sellers has limited investment volumes to year date, says Savills, which came to £227 million in H1 2017, 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.
Rod Leslie, director in the investment team at Savills Scotland, says: “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. The 25-50 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.”