In our latest Scottish Office Market Spotlight we reported leasing activity for the first half of 2017 across Aberdeen, Edinburgh and Glasgow had reached 1.4 million sq ft, already 20 per cent above the five-year half-year average.
Boosted by accelerated leasing activity in Aberdeen and the strongest office take-up ever recorded in Edinburgh, the figures demonstrate businesses in Scotland are shrugging off any uncertainty around wider political events. This mirrors a wider health kick seen across Scotland where the economy has recorded growth of 0.8 per cent in Q1 2017, the strongest quarterly growth for two years and outperforming the UK average of 0.2 per cent.
In Aberdeen, where office take-up during the first half of 2017 reached 238,000 sq ft (already exceeding 2016’s full year level of 231,000 sq ft), 78 per cent of activity is accounted for by the engineering, extraction and utilities sector. This marks a 17 per cent increase on last year, as the city benefits from the increase in oil prices. The leasing activity has seen office supply fall 3 per cent from the end of 2016. However, 2 million sq ft remains available and speculative developments expected to complete during the second half of 2017 will only 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 per cent above the five-year first-half average. This was partly driven by the GPU (Government Property Unit) signing a pre-let on 180,000 sq ft of space at New Waverley, Edinburgh. There is now only 313,000 sq ft of Grade A space remaining, enough to cater for a single year's demand.
Leasing activity across Glasgow’s wider office market during the first half of 2017 reached 434,000 sq ft, which 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. Occupiers requiring Grade A space are looking towards 394,000 sq ft of refurbished space currently underway. However, a lack of speculative development will keep rents at £30 per sq ft.
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.
Scotland’s robust occupier market and the weakening possibility of a second independence referendum is improving investor sentiment towards the country relative to the rest of UK, which in turn points to higher investment volumes and yield compression in certain segments of the market. As we see UK funds re-entering the fold, it is likely the Scottish market will see competition for prime assets intensify as the institutions compete with the overseas market in the second half of the year.
Read more: Savills Spotlight: Scottish Office Market