In Savills latest Scottish Office Market Spotlight we consider how large Government Property Unit (GPU) requirements and improved stability in the price of Brent crude oil will drive full-year Scottish office take-up volumes above the 10-year average of 2.1 million sq ft. However, despite a strong occupier market, investment into Scottish offices is falling due to a lack of stock coming to the market.
Office take-up reached 393,000 sq ft during the third quarter of 2017, in what is usually a quieter time of year, taking total volumes in the year to date to 1.8 million sq ft. With Brent crude oil having remained constant at US$50-$55 per barrel during Q3, Aberdeen recorded 325,000 sq ft of total take-up, of which over 50 per cent involved oil and gas related industries. Edinburgh saw take-up volumes surpass 970,000 sq ft, 9 per cent ahead of the five-year annual average. In Glasgow, 539,000 sq ft of offices have been absorbed with a further 180,000 sq ft pre-let at Atlantic Square by the GPU as part of its national relocation plan.
In terms of construction, Edinburgh is the only Scottish city with office developments under way. However, despite this activity, there is only enough availability for one year of Grade A take-up at current levels. Conversely, in Aberdeen, despite the increase in take-up, availability rose to 2.6 million sq ft over the past quarter, largely down to the practical completion of Marischal Square and The Silver Fin Building. Yet, while new buildings have come to the market in the last quarter, we believe supply has now peaked. With no more speculative developments in the pipeline, we expect rents for the very best space to remain around £30 per sq ft, although incentives will continue to be challenging for landlords.
Interestingly, despite a strong occupational market and healthy levels of investor demand from an ever-increasing pool of overseas buyers, alongside green shoots of renewed confidence amongst UK funds, investment volumes have fallen 9 per cent below the 10-year average for this stage in the year (£375 million has been invested in the year-to-date).
The reason for this is a lack of on-market investment stock as landlords look to hold onto long-term income streams. We have seen 75 per cent of all investment deals being agreed off market, which demonstrates the increasing competition among purchasers for well-let assets. Perhaps then, our biggest concern for Scotland’s commercial property investment market is a lack of stock which, up until now, has clearly been hampering volumes.
Read more: Savills Scottish offices report