Data for Scottish commercial real estate released by property consultant CBRE reveals that the annual total return for 2017 in Scotland was 6.8%, compared with the UK as a whole where the total return was 10.2% as measured by the IPD Quarterly Index.
Over the fourth quarter, the all property total return was 2.1%, up from 1.7% in Q3 2017. This increase is attributed to improved capital growth, with average capital values up by 0.6%. This represented the bulk of capital appreciation during the year, given the total uplift in 2017 was just 0.9% 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%, an increase from 1.6% 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% in 2017, in contrast to -0.2% in 2016. Despite capital value growth throughout the second half, it was not quite enough to reverse the loss incurred in the first half, a continued legacy of the results of the 2016 EU Referendum.
Total returns in retail saw a slight increase from 1.4% in Q3 to 1.5% in Q4, while the UK-wide figure saw a marginal slip. The annual total return for retail in 2017 was 5.8%, a marked improvement on the 1.0% 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% 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% during the year compared to 4.3% achieved in 2016. Industrials were the only sector to experience substantive capital growth in 2017, with values increasing by 5.5% on average, and rental value up by 1.0% over the same period. Like other sectors, growth rates improved during the course of the year. Capital values were up 2.0% alone in Q4, leading a quarterly total return of 2.5%.
At a city level, the industrial markets in Glasgow (14.2%) and Edinburgh (11.6%) were the only two city/sector 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% 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. Meanwhile office and retail sectors in Glasgow and Edinburgh all saw annual returns in excess of 7.5%, with Edinburgh offices reaching 9.7%.
A total of £2.5bn of stock was transacted in Scotland during 2017, up from £2.12bn in 2016. Whilst investment volumes were relatively low in the first half of the year, the second half, and in particular the final quarter, had a significant impact on the strength of the year-end total. The office sector was the key beneficiary of spending during the year, accounting for £807m of investment. The largest office deal of the year was the forward funding by Legal & General of the Government pre-let office building at New Waverley in Edinburgh. At just over £105m this was the only single asset sale of the year that was in excess of £100m.
Retail investment spending, totaling £664m during the year, was down in comparison to 2016, but was also boosted by a number of deals during the final quarter. These included the purchase of the Great Western Retail Park in Glasgow for £57m by Sidra Capital and the sale of the Tesco Extra store in Cumbernauld for £50m.
Steven Newlands, an executive director at CBRE, commented: “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.”