Glasgow Chamber Of Commerce

According to the Scottish Offices H1 2012 MarketView from leading property consultant CBRE, take up for office space across Aberdeen, Glasgow and Edinburgh increased significantly compared to H2 2011.    

Aberdeen has continued to experience very strong occupier demand so far this year, driven by the oil and energy sector. The continued high oil price has led to recruitment drives from this sector which is fuelling the demand for office space and resulting in take-up levels reaching 631,104 sq ft during the first six months of 2012. This is well above the half yearly average of 272,235 sq ft and is already 44% above the long term annual average of 438,239 sq ft.

Reluctance at a national level for the banking sector to fund speculative development is also the case in Aberdeen despite the strong occupational demand.  This is resulting in a severe shortage of ready to occupy Grade A space which is now at 27,304 sq ft and accounting for 5% of total availability.  

Derren McRae, managing director, CBRE Aberdeen, commented:  "The office market in Aberdeen is extremely buoyant at the moment with some significant transactions in H1 2012, namely three pre-lets of 100,000 sq ft each in the new business park development at Primefour, Kingswells.

"Prime rents remain at £31.50 per sq ft in Aberdeen which is an all-time high and the highest prime rent in all of the nine regional centres outside of the South East.  With the current market demand we have no doubt that prime rents could be improved on over the next six months however the issue is whether prime Grade A space actually becomes available to achieve a new record rent.

"Occupier demand in Aberdeen is likely to continue at currents levels for the remainder of the year, with the lack of ready to occupy Grade A space in turn likely to result in poorer quality Grade B stock being acquired."

The recession's impact on take-up in Edinburgh has lessened as the timing of lease breaks drives demand. Total take-up in the first six months reached 471,881 sq ft, 32% above the half yearly long-term average, indicating a very good start to the year.

In H1 the majority of demand has been led by the finance and consumer services sectors accounting for 42% and 30% of total take-up this year, respectively. The largest deals in 2012 to date are the 79,832 sq ft BlackRock deal at Exchange Place and Brewin Dolphin's acquisition of 47,816 sq ft at Atria Edinburgh.

Stewart Taylor, director, CBRE Edinburgh, said:  "With total availability of 2.73m sq ft, of which only 18% is prime Grade A space, the supply/demand pendulum is starting to swing away from tenants for the first time since 2007. With little in the development pipeline and only three buildings capable of accommodating a requirement of 25,000 sq ft, there is market awareness that there is an increasing risk of occupiers having to take the deal that is put in front of them or possibly of there being no suitable space available within the required timescale. Occupiers with upcoming lease events over the next three to four years are therefore starting to consider relocation and renewal options now."

Edinburgh prime rents are £27.00 per sq ft, however incentives of circa 30 months on a ten year term have started to move in. It is expected that this will be an increasing trend going forward as the availability of good quality Grade A stock reduces. Looking ahead it is anticipated that prime rents will remain stable over the next six months while secondary rents are likely to harden with a possible increase in rental levels for good quality secondary space due to the lack of Grade A supply.

Stewart added:  "We estimate that there is currently a further 50,000 sq ft of recently developed good quality city centre stock under offer.  Additionally there are several requirements of 35,000 sq ft to 40,000 sq ft in the market. This will have a further impact on Grade A availability. Consequently we anticipate good levels of demand throughout the course of next year against a backdrop of very limited availability. This will inevitably lead to a hardening of the terms available to tenants."

In Glasgow, total take-up in the first six months of the year reached 241,817 sq ft, 35% more than the same period last year and 59% up from the second half of 2011.  There has also been an increase in the size of transactions with 16 recorded lettings between 5,000 sq ft and 35,000 sq ft this year compared to seven transactions in this size band over the same period last year.

Total available supply is 2.24m sq ft, up just slightly from the end of 2011. With just 16%, or 361,850 sq ft, of this as prime, newly completed Grade A stock, Glasgow is yet another example of the squeeze on good quality available stock.  However, Abstract's 170,000 sq ft St Vincent Plaza development is due to start on site later in 2012 and is one of only two speculative schemes beginning this year in Scotland.

There have been significant incentives available to occupiers in Glasgow recently, and it is not anticipated that these will increase but rather that prime rents (currently at £27 per sq ft) will come under pressure if occupational demand declines yet further.  Rental reductions of around 5% -7% may be witnessed particularly for buildings compromised in quality or location terms. Rents and incentives on second-hand/Grade B accommodation are likely to witness similar downward pressure.

Audrey Dobson, senior director, CBRE Glasgow, said:  "Looking ahead we think occupational demand will remain slightly constrained, largely as a reflection of the current economic turbulence.  The professional and business process outsourcers have been particularly active in the market and we anticipate that this trend will continue during H2 2012.

"We expect to see continued demand coming from occupiers seeking to utilise their accommodation as efficiently as possible.  These occupiers will seek to make their properties work harder for them, saving by minimising duplication of functions through consolidating the number of locations from which they operate, and occupying them more efficiently."

Investment Market

On the back of the buoyant occupational market driven by the energy sector, there is a high level of investor interest in Aberdeen both from funds with existing assets in the city and also from new funds who have never invested here before.

Derren McRae commented:  "Whilst there is likely to be sales in the out of town market there is a definite lack of existing prime Grade A buildings in Aberdeen city centre coming to the market. Going forward we expect there will be more forward funding transactions on pre-let development sites which are being secured due to the lack of ready to occupy Grade A office in the city."

In Edinburgh, unlike the occupier market which has seen healthy demand so far this year, the investment market has been subdued. While there is a total of £11.3m of office transactions across the wider Edinburgh market, none of these were major transactions.

Gavin Willins, director, Capital Markets, CBRE Edinburgh, added:  "The previous 18-24 months had seen healthy demand and interest from overseas investors in Edinburgh. However, this year that interest has thinned, particularly from German investors who are primarily focusing on central London. UK institutional interest remains selective and going forward we expect interest to come from opportunistic purchasers taking advantage of market uncertainty and limited competition.  I am confident, that if there is a willing seller at current pricing levels, that this is a strong buying window for prime product in the medium term."

The investment market in Glasgow throughout H1 2012 has been extremely quiet with a substantial drop in activity.

One of the city's prime offices, the 131,250 sq ft G1 building, was brought to the market in May by HF Developments. A closing date took place on Friday 1st June and it is understood that an overseas fund is in exclusive talks to acquire the property.

Campbell Docherty, senior director, CBRE Glasgow, concluded:  "Looking ahead we expect the market to continue to be challenging in Glasgow this year. Purchasers continue to be motivated largely on the best quality assets, whether on short or long lease terms. With some liquidity issues in Germany we may see some overseas fund disposals and Nama related sales in the H2 2012."