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Scotland surges as investors seek value and target occupiers

Booming investment in Scotland has become a key theme of 2018.  Investment volumes hit £1.4bn in H1, up 86% on last year and comfortably the strongest H1 on record.  Of this total, 54% of purchases were by overseas buyers, ahead of the 10-year average of 37%, highlighting the increasing global appeal of Scotland.  Notable international investors in Scotland this year include LCN Capital Partners, Hines and Patrizia Immobilien.

The surge in activity has unsurprisingly been driven by the major cities, with £692m traded in Edinburgh and £344m in Glasgow during H1.  The office sector has seen the most activity, but the largest deals were for Edinburgh’s Fort Kinnaird Retail Park (£167m) and Waldorf Astoria hotel (£85m), highlighting Scotland’s broad appeal.

Comparative value draws global interest

As a result, prime office yields hardened to 4.75% in Edinburgh in Q2, one of only two European cities to see an increase in pricing during this period.  Despite this, the Scottish cities still offer considerable value against comparable European cities.

Of the 24 cities in JLL’s latest European Office Market Index, only 4 offer greater value than Edinburgh – Prague (4.85%), The Hague (5.10%), Budapest (6.00%) and Moscow (9.75%).  Glasgow offers an even greater discount, with yields currently at 5.25%.  This yield advantage is proving incredibly attractive to investors, while the ongoing currency advantage is also supportive.

JLL European Office Market Index – Prime Yields, 2018 Q2

Occupational drivers support investment

Another reason investors have flooded to Scotland is the buoyancy of the leasing markets.  Last year saw over 1.1m sq ft of office take-up in Edinburgh, 41% up on the 10-year average and the highest since 2003, while in Glasgow 625,000 sq ft was leased last year, 21% above the 10-year average.

This momentum has continued into 2018, particularly in Glasgow where 580,000 sq ft was leased in H1 alone, 150% ahead of the equivalent period last year and already 12% higher than the 10-year annual average.  Added to this is Barclay’s acquisition of 470,000 sq ft at Buchanan Wharf in July, for the development of a new HQ campus.  Glasgow take-up will exceed 1 million sq ft in a year for the first time, and we’re still little over halfway through, with the traditionally busier period to come.

Edinburgh & Glasgow office take-up, 2008 – 2018 H1

The occupier profile has evolved in recent years.  Glasgow has traditionally seen a large proportion of public sector take-up, and this remains an important part of the market, attracting investors in search of the Government’s risk-free, annuity style income.  However, the city is also becoming increasingly popular with private sector tenants, as evidenced by the recent Barclay’s mega-deal.

Edinburgh is the UK’s second biggest financial centre and has also become something of a tech hub, home to big name unicorns such as Skyscanner and FanDuel.  These sought-after occupiers are incredibly attractive to potential investors, and further support the growing interest in Scotland.

Tight supply results in rising pre-lets

Increased leasing has driven vacancy rates down.  Overall office vacancy in Edinburgh stands at 3.5%, the lowest on record, while in Glasgow the vacancy rate of 7.3% is the lowest since 2009.  Grade A vacancy is even more scarce, with rates of just 1.3% in Edinburgh and 2.0% in Glasgow.

Speculative development has been very limited, but Q2 saw the first spec starts in Glasgow for a long time – 197,000 sq ft across two schemes at Cadworks and Atlantic Square, both due to complete in 2020.  There are also only two spec schemes under construction in Edinburgh – 38,000 sq ft at 2 Semple Street, due to complete later this year, and 120,000 sq ft at Capital Square, due to complete in 2020.

Edinburgh’s Mint Building is also under construction, but is already pre-let to Baillie Gifford.  This highlights a key trend – as space becomes increasingly tight, many occupiers are addressing upcoming requirements earlier, driving up pre-leasing.  In fact, it is likely that the current spec schemes will also let prior to completion.

As a result, rents have risen significantly.  Prime office rents in Edinburgh now stand at £34 per sq ft, up 6% this year and in line with Manchester as the most expensive regional city, while in Glasgow prime rents have risen 7% so far this year, to £32 per sq ft.

As long as Scotland continues to offer strong value and a diverse, dynamic occupier base, investor interest is likely to remain high.


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