Edinburgh: a global city in demand

Edinburgh
 
A global city

3 November 2017, by Savills Research

Developing the appropriate commercial and residential space in Edinburgh is key to unlocking growth

 

Edinburgh is home to more FTSE 100 companies than any other UK city outside London, with a large banking, insurance and financial services occupier base. But, it is not just large corporates which are driving growth in the city. Edinburgh has a higher proportion of start-ups per 10,000 population than the UK average, which cluster within incubators such as those operated by Codebase, before expanding into conventional office space on their maturity. Skyscanner, FanDuel and Rockstar North are key examples of home-grown tech companies who now employ over 500 workers in the city collectively.

However, Edinburgh has also drawn global occupiers including Microsoft and Amazon, which have been attracted by the relative affordability of talent, compared with competing global innovation centres. Multinationals are generally most concerned with securing the best talent at competitive wages, as wage costs account for around 55% of total business costs, whereas property costs only account for around 15%.

Accounting for exchange rates, the annual salary of a software development engineer in Edinburgh is 33% lower than that of the equivalent role in San Francisco, so global occupiers will continue to favour Edinburgh for affordable talent.

Edinburgh’s large talent pool is partly down to the University of Edinburgh, one of the leading centres for computer science. The city is able to retain 42% of its graduates upon graduation and with 3,200 additional professional, science and tech jobs forecast in the city over the next five years, a number of these roles will be filled by graduates of the university.

FIGURE 1

Affordable talent keeps Edinburgh attractive

 
Figure 1

Source: Glassdoor

Investing for the future

As part of the recent £1.1 billion City Deal, UK and Scottish Governments are each investing £300m into Edinburgh, which will be used to support growth through innovation, infrastructure, housing, tourism and culture, including a new concert hall. Investments at Heriot-Watt, Queen Margaret and Edinburgh University will also contribute to the deal which is expected to create an additional 21,000 jobs for the city.

Commercial property investment activity has accelerated in Edinburgh following June’s General Election. Edinburgh attracted £1.2 billion of commercial investment during 2016, the highest level for 10 years, which was driven by a record year from overseas investors. The risk premium has contracted, relative to the rest of UK offices given the likelihood of a second independence referendum now lower, coupled with the potential for a softer “Brexit”.

During 2017, Edinburgh’s prime office yields have moved in 25 basis points to 5.25%, and 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.

Office market pressures

The office market remains structurally undersupplied. Average take up volumes across the past five years have reached 623,000 sq ft, and Savills forecast 2017 take up volumes to exceed this by at least 20%.

Grade A availability currently stands at only 259,000 sq ft, enough to cater for around one year’s worth of Grade A demand. With only 100,000 sq ft of speculative office developments under construction, Grade A office supply will remain scarce. This has the potential to push on new build rents to £34 per sq ft for a top floor suite in the city centre by the end of this year.

Tourist hotspot

Edinburgh is the UK’s second city for international tourism, with data indicating the city welcomed 1.7m international overnight visitors in 2016, up 7.6% on the previous year, spending a total of $1.1bn and placing it above other European cities such as Copenhagen (1.6m overnight visitors) and Hamburg (1.5m overnight visits).

While ranking second to London in terms of number of international arrivals, the relative ‘impact’ generated from overseas arrivals is more pronounced in Edinburgh. For example, relative to the city’s urban population there are 3.36 international arrivals per capita exceeding the 1.93 recorded for London (see Figure 2). In fact, Edinburgh ranks 8th globally for international arrival ‘penetration’, exceeding larger visitor markets such as Bangkok, Singapore and Kuala Lumpur.

FIGURE 2

International arrivals per capita

 
Figure 2

Source: Mastercard, UN Urban Areas

Edinburgh’s hospitality and retail markets have been benefiting from the weak Sterling post the EU Referendum, due to its appeal to overseas visitors. This boost from currency fluctuations is apparent in hotel performance data and retail sales. Year to date, RevPAR for Edinburgh hotels is up 14.6% on the previous year according to STR (as of August 2017), some of the strongest growth seen in the market over the last five years.

Likewise retail sales in Edinburgh’s city centre are up 3.1% year on year as of June 2017, according to data from Essential Edinburgh, and have been tracking upwards in line with the softening in Sterling. The relatively high penetration rate of international arrivals highlights the bearing they have on Edinburgh’s retail market.

Undersupplied residential market

Between 2001 and 2011 the population of Edinburgh grew by 28,000 or 6.2%, reaching 476,626. During this time the number of households grew by 18,398, reaching 223,081.

Between 2011 and 2017 growth has continued and the population exceeded 500,000 for the first time in 2016. The population is forecast to grow by in excess of 5,000 people per year and the number of households by in excess of 3,000 per year over the next 20 years. This will add further pressure on an already tight housing market which is lacking stock.

New build development has not kept pace with population and household growth, delivering on average 1,080 new homes per year (2008–2017 Q1). Whilst there has been a recent pick up reaching 1,832 units in the year to March 2017, this is not enough to mitigate historic undersupply.

This has had two main implications. There is a lack of supply which is constraining transactions. This is both a second hand and new build market challenge because without appropriate supply the market will intensify.

With less stock, transaction values will increase. Annually the average transaction value has increased by 5% from £230,261 to £240,942 but there are individual areas where growth has been considerably quicker. This raises affordability challenges for the city.

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