scottish property review...2 scottish property review apr/16 economy scottish gdp grew by 0.9% on an...

ArtworkClient: Ryden Doc: 1-00101780.002 Ryden 78th Property Review 2016 AW

Project: Scottish Property Review Size: (297)mm x (210)mm A/C: Chris AW: RB

C M Y K VARNISH WHITE Date: 02.05.16 Version: 7

Scottish Property Review

78th

APR/16

SCOTTISH PROPERTY REVIEW APR/16

Marischal Square, Aberdeen

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Scottish economic growth deteriorated during the second half of 2015 and is likely to have remained weak through the early months of 2016. Disinvestment by offshore companies in response to the low oil price is one factor in this apparent stagnation.

Office markets continue to move in very different cycles. Glasgow offices are achieving strong Grade A take-up and Edinburgh has witnessed near record levels of sales and lettings. Aberdeen faces a multi-year market adjustment as the development lag delivers new schemes into weaker occupier markets.

Industrial property markets are active but are digesting the loss of vacant rates relief.

The retail sector is active and focused on re-energising, expanding and diversifying existing prime locations.

The property investment market has been selectively active, but is now slowing, with the prospect of a post-EU Referendum rebound for strong regional markets such as Glasgow and Edinburgh.

DR MARK ROBERTSON, PARTNER

2


Economy

Scottish GDP grew by 0.9% on an annual basis (from Q4 2014 to Q4 2015), and by 0.2% during the fourth quarter of 2015. Output during Q4 2015 increased modestly in both the construction sector (0.1%) and in the dominant services sector (0.3%), but contracted in the production sector (-0.1%).

The most recent Bank of Scotland Purchasing Managers’ Index (PMI March 2016 = 48.5) indicates a deterioration in business conditions in Scotland’s private sector. A fall from 49.2 in February is attributable to a sharp contraction in the manufacturing sector; the decline in service activity was more muted. Two consecutive months of a PMI below 50 is a worrying trend following the weak second half in 2015.

The Scottish unemployment rate for the three months December 2015 to February 2016 rose by 20,000 to stand at 171,000, equivalent to 6.2% and well above the equivalent UK rate of 5.1%. The Scottish unemployment claimant count was 2.5% in February 2016.

According to the Committee of Scottish Clearing Bankers, the number of new business accounts opened during 2015 was down by a marginal 1% on 2014, at 11,669. The largest share of new businesses (29%) was in the real estate, renting and other business sector.

The Insolvency Service reports a total of 260 company insolvencies in Scotland in the fourth quarter of 2015, which is up by 20.4% compared with the same period of 2014. During 2015 as a whole however, company insolvencies were 1.1% lower than 2014.

According to the Scottish Government’s Retail Sales Index, sales grew by 0.6% during the fourth quarter of 2015, and by 2.2% on an annual basis. Retail sales in Great Britain recorded higher annual growth of 3.7% for 2015.

The Scottish Retail Consortium reports that retail sales fell by 1.3% year-on-year to March 2016, a faster fall than the 0.7% reported in February.

According to the Department for Energy and Climate Change, indigenous production of crude oil increased by 16.6% in the fourth quarter of 2015 compared with the same period of 2014. However, oil prices continue to hover at around $40 to $45 per barrel, compared with their recent peak at $118 in 2013.

Consensus forecasts for UK Economic Growth published by HM Treasury in March 2015 predict growth of 2.0% in 2016 and 2.2% for 2017. The EY ITEM Club predicts growth of 2.6% during 2016 and the International Monetary Fund’s forecast for the UK in 2016 is growth of 2.2%.

For Scotland, Fraser of Allander Institute’s central forecast – published in March 2016 – is for 1.9% in 2016 and 2.2% in 2017. EY ITEM Club’s winter forecast predicts growth of 1.8% for the Scottish economy in 2016. These forecasts would reflect a positive upturn for the Scottish economy in comparison with the weak second half of 2015 and poor lead indicators for early 2016.

In summary, the performance of the Scottish economy deteriorated markedly during the second half of 2015 and early 2016. It is likely – and is observable in the property market – that a significant proportion of this is due to disinvestment by the offshore industry in response to the continuing weak oil price, which affects not just the North-East of Scotland but also the industrial and service supply chain across the country. The extent of the slowdown suggests however that other factors, potentially including the May 2016 Holyrood Elections and the June 2016 EU Referendum, are also weighing on economic performance.

The Scottish economy continued to grow during 2015, however the estimate for Q3 2015 was revised down by Scotland’s chief statistician from +0.1% to -0.1%. This ended a sequence of 11 straight quarters of growth in Scotland and prevented a three-year unbroken run.

3


Televerde plans up to 170 call centre jobs at its new European headquarters in Glasgow over the next two years.

In the Scottish Borders, IT services firm CGI plans to open a new centre of excellence creating 200 new positions.

Hotel group Premier Inn is creating 150 new jobs in Edinburgh with three new hotels located in the Old Town, on New Market Street and on York Place.

In Stirling, plastics packaging firm Nampak Plastics Europe plans to create 20 new jobs at Springkerse Industrial Estate.

Discount retailer Poundworld plans to open 10 new stores in Scotland within the next six months, creating 300 new jobs.

An expansion of pharmaceutical firm GlaxoSmithKline’s penicillin production plant in Irvine is expected to create 55 new positions.

Recent announcements in the oil and gas industry include: engineering services group EnerMech to shed 90 North Sea jobs; subsea firm Aker Solutions announced 280 job losses in its Aberdeen and London offices; oil and gas operator EnQuest to cut 45 jobs in Aberdeen; BP plans to cut around 600 of its North Sea positions; and oil and gas firm TAQA Bratani with 100 North Sea job losses.

Johnson Matthey Battery Systems is moving its operations from Dundee to Milton Keynes; the factory closure will lead to the loss of 60 positions.

Fashion clothing retail Forever 21 is closing its flagship store on Buchanan Street, Glasgow with the loss of 75 jobs.

Over 100 positions will be lost with the closure of the Polaroid Eyewear plant in Vale of Leven, which is expected to happen by Spring 2017.

German dairy firm Müller plans to close its dairy processing plants in Aberdeen and East Kilbride with the loss of 229 jobs.

Marine Harvest will shed 80 positions at its fish farms and offices in Scotland, including 44 at its site in Lochaber.

In Kilmarnock, MAHLE Group, a supplier to the automotive industry, made 170 workers redundant with the closure of its finishing unit at the site.

Swiss-based Franke Group is undertaking a phased closure over the next 18 – 20 months of the Carron Phoenix sink manufacturing plant in Falkirk which will result in the loss of around 200 jobs.

Job gains:

Job losses:

4


PlanningDraft Planning Delivery Advice: Housing and Infrastructure

The Scottish Government launched its draft Planning Delivery Advice: Housing and Infrastructure on 17 February 2016. It was subject to a six week consultation period, which closed on 31 March 2016.

The draft advice follows Ryden’s Planning for Infrastructure Research Report and is concerned with improving housing and infrastructure delivery, primarily through the development plan process, but will also be a material consideration in the determination of planning applications and appeals.

Many recommendations set out in Planning for Infrastructure are picked up by this draft advice. Early and better information on infrastructure capacity and more consistent cross-agency working will be key to overcoming infrastructure constraints that can hold up the delivery of development.

A move to satisfy these concerns and a more concerted effort to drive the delivery of infrastructure to enable the significant levels of new housing required across the country should be the priority for the Government’s finalised advice.

Planning consequences of changes to vacant rates relief

Changes introduced by the Scottish Government on 1 April 2016 significantly reduced the amount of rates relief on empty industrial and commercial property. Prior to April, vacant industrial property received 100% rates relief. This now only applies for the first six months, reducing to just 10% thereafter. Other commercial property previously obtained 100% relief for the first three months but that has now been reduced to 50% for the first three months, dropping to 10% thereafter.

With such severe financial implications for property owners and the development industry, a number of un-intended consequences have begun to emerge. Speculative office and industrial development, which had only recently started to increase following the recession, is again under scrutiny. Understandably, developers are reluctant to commit, particularly in areas where markets are struggling, if there is little prospect of a pre-let prior to completion. Many are simply not prepared to take the risk of a recently completed property being left vacant.

Older industrial and office properties which have become vacant and fall short of current standards and occupier expectations are being considered for demolition and in

some cases redevelopment for alternative uses. In some instances this is welcomed by planning authorities as a catalyst for regeneration. However, in others it can create conflict with development plan policies, particularly where non-conforming alternative uses are proposed. Unfortunately, Development Plans, given the time they take to prepare, are not geared to react to such changes and the consequence is likely to be ‘planning by appeal’.

Planning performance statistics

The Scottish Government has published its Planning Performance Statistics for October to December 2015 (Quarter 3). A total of 7,024 planning applications were decided in that period, which is down by 7% from Quarter 2 and by 4% from the same period the previous year. 94% of these applications were approved.

The average time taken to determine local housing applications was 13.6 weeks, roughly the same as the previous quarter and the same period last year. Only 56% of local housing applications were determined in two months. This means that approximately 44% of local applications are still taking more than the required eight weeks to determine. Local business and industry applications are determined more quickly, on average taking only 9.8 weeks. 69% are determined within the required 8 weeks, which is down slightly from the previous quarter.

All major developments are taking, on average, 32.7 weeks to determine, which is slower than Quarter 2, but faster than the same quarter last year. Major housing developments, on average, take longer to determine at 35.3 weeks, with major business and industry developments taking the longest, on average, being determined in 39 weeks. This does not include the 12 week pre-application period where information requirements are discussed, prepared and submitted up front, before the clock starts ticking.

While the majority of these applications are being approved, planning applications are still taking far too long to be determined. It is worrying that the time taken to make a decision on major applications is more than double the statutory timeframe of 13 weeks. This is impacting negatively on the development industry and could ultimately affect the viability of major projects at a time when the industry needs support the most. It is accepted that some applications will be complex, requiring additional time to ensure the right outcome, but the development management process needs to be streamlined, with additional resources required to ensure applications are decided timeously to encourage continued economic investment.

5


Offices

Glasgow experienced a flurry of deal completions between September 2015 and January 2016. There were eight lettings in the major new build developments at St Vincent Plaza, 110 Queen Street and 1 West Regent Street. Allied to a range of lettings across the wider market, this produced a strong turn of the year with take-up over the last six months at 39,254 sq.m. resulting in a 12 month total of 67,902 sq.m. This excludes ACCA’s (Association of Chartered Certified Accountants) taking 5,179 sq.m. at 110 Queen Street, which concluded after our statistics cut-off date and HFD Group’s pre-let of 14,739 sq.m. to Morgan Stanley at 122 Waterloo Street. HFD also has consent for a further 19,974 sq.m. of speculative development on their adjoining 177 Bothwell Street site. A sample of deals is contained in the table on page 6. Further letting activity is anticipated within the existing new build developments and higher quality refurbishments.

This surge would normally create the stimulus for those developers with planning consent to trigger the next cycle of speculative new build development. However, concerns over the availability of institutional funding is delaying the next phase and major new development completions are now likely to be pushed out to 2019.

As such, occupiers’ choice of offices in Glasgow will continue to erode. For larger occupiers there are only six new or high quality refurbished buildings that can provide over 1,858 sq.m. with floors over 1,394 sq.m., and only four buildings that can provide a self-contained option over 1,858 sq.m.

This hiatus in new development presents an opportunity for the refurbishment market, which various landlords and developers are now targeting. Examples are: EPIC UK at 9 George Square (up to 4,900 sq.m. in two phases); Aviva at 123 St Vincent Street (4,180 sq.m.) and at The Beacon, St Vincent Street (2,297 sq.m.); Esson Properties at 100 Queen Street (4,945 sq.m.); Whiteburn Projects at 100 West George Street (2,400 sq.m.); Queenside at 65 West Regent Street (3,130 sq.m.); USS at Atrium Court, Waterloo Street (3,275 sq.m.); LIS at Tay House, Bath Street (4,530 sq.m.); and Cornerstone at 220 St Vincent Street (1,410 sq.m.).

An interesting barometer of the current climate and developer appetite in the speculative refurbishment market will be the outcome of opportunities currently

being offered for sale at Dalmore House, 310 St Vincent Street (6,545 sq.m.) and 50 Bothwell Street (office element 7,246 sq.m.), by Praxis and M&G respectively.

While the refurbishment completions noted will add to availability, this is countered by recent large scale letting activity. Total supply remains relatively static at 350,026 sq.m., with 218,030 sq.m. (62%) in the city centre and the periphery offering 131,996 sq.m. (38%).

On the periphery, there continues to be reasonable activity across a range of properties and sizes. Clyde Gateway secured notable success at the recently completed low carbon One Rutherglen Links, where SPIE Matthew Hall has taken 1,654 sq.m. and at The Albus, Bridgeton where Peebles Media Group has taken 606 sq.m. Teekay Shipping expanded into a further 583 sq.m. at 144 Elliot Street. Systal has taken 650 sq.m. at Nova Business Park, Robroyston. The Hub, Pacific Quay, continues to attract occupiers with a mix of new lettings to Spaarks and Green Bird Media and expansion for SwarmOnline and Digirati. At Skypark, Lockheed Martin has taken an additional 490 sq.m. and new occupier Stream Technologies has taken 315 sq.m.

The out-of-town market has also recorded activity with Buchanan Park attracting Mortgage Force, Solutions Driven and Doka; Spectrum Service Solutions at Westpoint Business Park, Glasgow Airport (436 sq.m.); KONE at Glasgow Business Park (357 sq.m.); Braid Logistics at Riverside, Braehead (562 sq.m.); Schenker Limited at The Arc, Hillington (225 sq.m.); and at Strathclyde Business Park Securitas and Genpact have taken 427 sq.m. and 325 sq.m. at Bothwell House and Willow House respectively.

Prime headline office rents in Glasgow are £306-£323 per sq.m. Despite reducing occupier choice at the Grade A end of the market, incentive levels remain very competitive as developers seek to secure the best occupier lettings.

There is a wide range of quality and therefore rental for refurbished office space. There are options available for good space from £178 per sq.m., rising to £247-£280 per sq.m. for high quality space or potentially more for the best upper floors.

Scotland’s office market cycles continue to diverge. Aberdeen faces a multi-year market adjustment while Edinburgh and Glasgow are experiencing strong occupier demand and limited new-build development activity.

6


Address Size Occupier122 Waterloo Street 14,739 sq.m. Morgan Stanley (Pre-Let –

development completion end 2017)

St Vincent Plaza, St Vincent Street 3,689 sq.m. KPMG

1,605 sq.m. Whyte & Mackay

1,607 sq.m. Registers of Scotland

1 West Regent Street 1,943 sq.m. CMS

1,273 sq.m. Shepherd and Wedderburn

1,272 sq.m. FDM Group

110 Queen Street 1,705 sq.m. DWF

Granite House, Stockwell Street 1,812 sq.m. Clydesdale Bank

Pacific House, 70 Wellington Street 1,128 sq.m. Big Lottery Fund

67 Hope Street 1,759 sq.m. Pure Gym

One Rutherglen Links 1,654 sq.m. SPIE Matthew Hall

Nova Business Park 651 sq.m. Systal

The Albus Building, Bridgeton 606 sq.m. Peebles Media Group

Larger office deals in Glasgow over the last six months include:

Glasgow office supply and take-up

400,000

MAR-12 MAR-13 MAR-14 MAR-15 MAR-160

sq.m

.

200,000

150,000

100,000

50,000

300,000

250,000

350,000

Supply Take–up

Edinburgh’s office market achieved 63,220 sq.m. of take-up during the six months to March 2016. This represents a 50% increase in the activity from the previous six month period. Total take-up for the 12 months to March 2016 is 105,260 sq.m., which is the highest on record since 2000 (a boom period when financial services, the dot.com sector and fresh devolution were all driving the city’s office market).

Within the city centre, office take-up totalled 36,550 sq.m. across 74 deals, representing 58% of the total take-up, which is down on the previous six month period. Grade A and good quality accommodation accounted for 11,981 sq.m. or 33% of city centre office take-up.

Edinburgh city centre take-up was led by notable lettings including: University of Edinburgh, CodeClan and

CodeBase at Argyle House (totalling 7,319 sq.m. of new lettings); Cirrus Logic at Quartermile 4 (6,507 sq.m.); Baxters, Institute of Directors and Lomond Capital at the Charlotte Collection (totalling 1,825 sq.m.); Amazon expanding at Waverley Gate (1,257 sq.m. of new space); Chiltern’s expansion at The Stamp Office, Waterloo Place (678 sq.m.); St James’s Place Unit Trust at The Cube (603 sq.m.); and Nikko Asset Management at Edinburgh Quay 2 (280 sq.m.).

City centre activity also included sales of office buildings for alternative uses. Notable examples include: 1-2 St Andrew Square (1,300 sq.m.) for commercial development; and Ryden’s former offices at 42/46 Castle Street (1,000 sq.m.), 29 Drumsheugh Gardens (595 sq.m.) as well as 10 Bell’s Brae (1,660 sq.m.) and 6/7 Drumsheugh Gardens (1,207 sq.m.) for conversion to residential use.

Take-up in the peripheral office markets in Edinburgh saw a total of 26,670 sq.m. transacted across 32 deals. Notably West Edinburgh attracted a total of 12,835 sq.m. of occupational activity transacted across nine deals, which is a marked increase in floorspace activity from the previous six month period, albeit this is largely led by the sale of The Stones, South Gyle to Edinburgh Napier University (9,940 sq.m).

In addition to the sale of The Stones, there have been other notable transactions recorded in west Edinburgh, including the completion to HSBC at Lochside Avenue (3,716 sq.m.); Origo Services at 7 Lochside View (1,019 sq.m.); and the acquisition of 3 Lochside View and 4/5 Lochside View by J.P. Morgan (7,854 sq.m.).

7

These transactions have resulted in pressure on the supply of good quality, modern office accommodation within The Gyle and Edinburgh Park area, and with a lack of proposed development in the vicinity any sizeable occupier requirement may have to consider other business park locations.

In North Edinburgh, some notable transactions include lettings to INOVA Geophysical and Royal HaskoningDHV at Commercial Quay (total 579 sq.m.) and sales at 112 Commercial Street to Mearns & Company (668 sq.m.) and 25 Bernard Street/25 Maritime Street to the Rokpa Trust (401 sq.m.).

Prime office rents in central Edinburgh remain around £300 per sq.m., although pre-letting activity is still continuing at rents slightly above this level. Incentives remain around 18-24 months rent free for a 10-year lease commitment to the highest quality occupier covenants. Significant rental growth has yet to materialise in this market cycle, however pre-letting activity should see rents rise above £323 per sq.m. and incentives could potentially face downward pressure given the tightening supply of space.

Total office supply across Edinburgh at March 2016 is 184,840 sq.m., a further decrease of 5% since October 2015.

The continued lack of immediate Grade A supply in Edinburgh city centre is evident, and with a number of requirements circulating across the city, remaining Grade A space could be further reduced over the next few months and, crucially, before the next wave of developments is available for occupation.

Following the successful pre-letting of Quartermile 4, M&G Real Estate has commenced on site with Quartermile 3 which will comprise 6,781 sq.m. and has an anticipated completion date of Q4 2017. At Tiger Developments/Interserve’s The Haymarket, the majority of the underground works have now completed, allowing Phase 1 of this mixed use development to commence, providing 8,825 sq.m. of office accommodation with a number of pre-letting retail options having been secured within the ground floor. It is possible that the development partners may also commence with Haymarket 1, which would provide 16,113 sq.m. of office accommodation.

The next phase of the development cycle for potential completion in 2018 includes the speculative development of 4,180 sq.m. of Grade A offices on Semple Street by GSS Developments; Hermes Investment Management and Parlison Properties’ 11,334 sq.m. of Grade A offices in The Exchange; and Chris Stewart Group commencing with 5,574 sq.m. at The Mint Building, 42 St Andrews Square.

Other design-and-build opportunities include: New Waverley by Artisan Real Estate Investment (15,793 sq.m.); Fountain Quay’s potential joint venture with the City of Edinburgh Council (12,541 sq.m.); Dewar Place by SP Energy Networks and C220 (13,935 sq.m.); and Freer Street by Amco Developments Group (13,000 sq.m.) as well as a number of refurbishment options situated on George Street and surrounding locations.

SCOTTISH PROPERTY REVIEW APR/15SCOTTISH PROPERTY REVIEW APR/16

Address Size OccupierQuartermile 4 6,507 sq.m. Cirrus Logic

Waverley Gate 1,257 sq.m. Amazon

The Stones at South Gyle 9,940 sq.m. Edinburgh Napier University

Lochside Avenue, Edinburgh Park 3,716 sq.m. HSBC

7 Lochside View, Edinburgh Park 1,019 sq.m. Origo Services

Larger office deals in Edinburgh over the last six months include:

Edinburgh office supply and take-up

300,000


sq.m

.

150,000

100,000

50,000

200,000

250,000

Supply Take–up

8

Turbulent times have continued in Aberdeen over the past six months and the office market has suffered accordingly. Within this period Brent Crude Oil dropped to below $28 per barrel which was its lowest level since 2003. At the time of writing it is trading above $40 per barrel which, although a step in the right direction, is still at an unsustainable level resulting in a lack of activity throughout the sector.

The recent Budget incorporated a number of oil & gas measures which included a rate cut of the supplementary charge from 20% to 10% and the effective abolition of the petroleum revenue tax. Although welcome, these changes fell short of industry expectations. For several years the industry has been lobbying for a lower tax burden to recognise the higher cost base and the maturity of the North Sea oil & gas basin.

Although there is still a huge oversupply of oil, general sentiment appears to be that as a result of current inactivity this will change towards the end of the year and the price should start to rise. That said, respected commentators have been proven wrong on many occasions since this downturn commenced in 2014 and the property market balance described below would suggest that a multi-year adjustment can be anticipated.

Office supply has increased by a whopping 37% to 222,910 sq.m. in 204 properties, including schemes which are currently under construction. Of this around 121,000 sq.m. is considered to be Grade A stock with 34,220 sq.m. under construction. Approximately 25% of this comprises older stock of poorer quality.

Take-up in the sector has fallen by 71% to 7,725 sq.m. over the past six months, resulting in an annual take-up of 33,885 sq.m. which is well below the 10-year average of 70,820 sq.m. The number of transactions was down by 11% to 40 but more significantly, the largest transaction was only 980 sq.m. Approximately 50% of the take-up was of Grade A accommodation.

In the city centre, AB1 on Huntly Street continues to fill up with two further lettings to the Department for Energy & Climate Change (725 sq.m.) and Crown Office and Procurator Fiscal Services (980 sq.m.), meaning that the building is now two-thirds let. Knight Property Group’s speculative 6,770 sq.m. Capitol scheme has just been completed and the top floor (933 sq.m.) has been let to PwC (after our statistics cut off date). Work continues on

Muse’s Marischal Square and Titan’s Silver Fin speculative office developments in the city centre, both of which are on target for completion during Q2 2017.

There has been a lack of activity in Aberdeen’s peripheral locations where there is currently 15,400 sq.m. of new-build office stock sitting vacant.

In general, the market has turned full circle and there is now a large amount of Grade A stock available facing limited take-up. The office market in recent years has been restricted by a lack of stock, which is clearly no longer the case. This will undoubtedly open up opportunities for tenants as and when the offshore industry rebounds. Market rents have been under pressure, however the dearth of deals precludes meaningful rental analysis at this time. Incentives have inevitably increased, meaning that tenants fortunate enough to find themselves with lease events are starting to capitalise on this and are considering moves on favourable terms. Many currently find themselves in secondary stock which is largely unsuitable, however the dynamics of the market have changed and it seems likely that occupiers will start taking advantage of this by relocating to better stock. This in turn may create an interesting regeneration challenge/opportunity for Aberdeen as older buildings fall out of the office market.

One of the unique characteristics of the Aberdeen market (and the energy industry that drives it) is that it is generally out of “sync” with the remainder of the UK market and that it can change very quickly. While it may


Address Size OccupierAB1, Huntly Street 980 sq.m. Crown Office and Procurator

Fiscal Services

AB1, Huntly Street 725 sq.m. Department for Energy & Climate Change

Balmoral Business Park 621 sq.m. North Sea Midstream Partners

Larger office deals in Aberdeen over the last six months include:

Aberdeen office supply and take-up

250,000


sq.m

. 150,000

100,000

50,000

200,000

Supply Take–up

9

be “oversupplied” at present, experience would suggest the supply of new Grade A space currently under construction should be viewed as a welcome addition which the city will need to maintain its leading position as an energy hub in the future.

According to recent figures, Dundee saw the biggest rise in the number of new companies registered in Scotland last year and this has been reflected in take-up over the last six months. Demand for offices continues to be mainly from smaller requirements up to 139 sq.m., with the majority of serviced offices now fully occupied. Office rents in Dundee remain at £161 per sq.m.

Recent transactions in Dundee include lettings to Capability Scotland at Unit 10 City Quay (377 sq.m.) and Kobojo Ltd within Suite 13 of The Vision Building (527 sq.m.) from P4 Property Holdings on a 10 year lease. Priority Care Group Ltd purchased office space at 23 Roseangle (325 sq.m.) and The Inclusion Group purchased an office from Home in Scotland Ltd at 27 Albert Square (424 sq.m.).

With the lack of Grade A accommodation available, developers are now considering the next generation of new office space. Dundee Waterfront has named Our Enterprise and Robertson Group as Dundee City Council’s partners to develop Plot Two and Plot Six within Dundee’s ambitious Waterfront scheme. Our Enterprise has revealed plans for a new Design and Innovation Quarter which include flexible office/studio space for the creative industries, while Robertson Group will look to provide a £40 million mixed-use scheme including 4,645 sq.m. of Grade A office space.

At City Quay, proposals have been submitted to turn Shed 25, a category B-listed dockside transit shed, into a mixed use development including eleven new start-up offices.


Prime city office rents 2016 (£ per sq.m.)

Aberdeen

Glasgow

Edinburgh

Dundee

345

323

300

161

10


Industrial

Supply of industrial property continues to fall within the Greater Glasgow market and most locations in the West of Scotland. Availability has been trending downwards since late 2011 and asking rents have been rising since the middle of 2013. The development sector has shown greater interest in creating new product, however tender returns are showing a marked rise in construction costs and there are still few projects on site. Certainly far too few to cater for active and latent demand.

At the time of writing, the following modern buildings are in legal hands: 2 James Street, Bellshill (4,831 sq.m.); 44 Fullarton Drive, Cambuslang (3,530 sq.m.); 1 Springhill Drive South, Glasgow Business Park (3,732 sq.m.); 101 Cambuslang Road (1,094 sq.m.); and 3 Watt Road, Blantyre (3,192 sq.m.). Deals on these buildings should complete within the next few weeks. In addition, M7 Real Estate has announced that Imperial Park, Linwood, Paisley is fully let following a deal to Supply Technologies for the remaining Unit 4 (1,858 sq.m.). A further demonstration of demand has been shown by the early viewings and issue of terms on MEPC’s 1,811 sq.m. Building 601 at Clyde Gateway East, which was only vacated by the previous tenant in April 2016.

The availability of modern industrial units of 1,393 – 4,645 sq.m. in prime locations is now at critically low levels for a city of Glasgow’s size. A lack of space is now restricting take-up and the vacancy level has plateaued not because of a lack of demand, but because some of the available space is unsuited to current needs. Thousands of square metres of obsolete industrial buildings are included in the already low vacancy rate of c. 8.4% for the Greater Glasgow area (CoStar). The availability of modern, occupiable space is much lower and it is possible that unfilled demand is being forced to take space outwith the Central Belt and perhaps even outwith Scotland.

The level of interest from new entrants to the Scottish market has been disappointing. Most of the interest is from companies already operating here. There has been a decline in enquiries from small to mid-sized English-based businesses seeking opportunities in Scotland. The uncertainty over Scotland’s political future is affecting investment interest and may also affect occupational demand from inward investors, although a company that has decided to delay or abandon plans for an entry into the Scottish market is unlikely to make its position known.

The industrial leasing activity listed on page 11 is encouraging and second-hand stock is achieving in excess of £65 per sq.m. Development remains limited however. Appraisals point to the need for a further significant rise in rents to combat rising costs. For example, the required rent on a 1,858 sq.m. unit is heading towards £86 per sq.m. given construction cost inflation, increased building standards and fewer contracting businesses to carry out the work. This is placing pressure on land values, but the land element is a relatively small part of the overall cost. Prime industrial land is around £0.433 million per hectare, although there have been few transactions to confirm pricing and higher costs will depress land values.

Some developers are committed to speculative development. J Smart & Co is currently on site to construct a 2,024 sq.m. unit at Belgrave Point, Bellshill, a completion date is set for May 2016 and the quoting rent is £86 per sq.m. Fusion Assets is set to continue with its sixth investment utilising the SPRUCE fund and taking the total invested so far to over £43 million. Strathclyde Business Park is currently on site where 15 smaller units will be created, while at Gartcosh, J Smart & Co has been appointed as Fusion’s preferred development partner and the scheme is being appraised with the likely intention to bring forward a single building of c. 1,858 sq.m. At Hillington, Patrizia Immobilien AG and Oaktree Capital Management are appraising projects with the aim of bringing new product to the thriving estate in 2016. MEPC will pursue a single speculative unit of 1,627 sq.m. at Clyde Gateway East. With an intended start date of June 2016 and completion in early 2017 the quoting rent is likely to be in the region of £86 per sq.m. At Eurocentral, Muse is reviewing further phases of development but has no definite plans for a site start although discussions are progressing with a potential funder. At Rutherglen Links close to Junction 2 of the M74, Harris Finance has purchased a plot and intends to build a unit of 1,858 sq.m. and perhaps another of 929 sq.m.

Zephyr (Scotland) Ltd purchased the 4 hectare Scotland Street site in Glasgow for a major re-development project. The derelict brownfield site currently consists of dilapidated industrial buildings that formed part of the former Howdens engineering complex. This strategic site is less than one mile from Glasgow city centre.

Good occupational markets and low supply in Scotland’s Central Belt industrial market had been beginning to stimulate speculative development proposals but this has been set back by reduced industrial rates relief.

11

The development market is unlikely to consider many units in excess of 4,645 sq.m. on a speculative basis, however there is life in the big box market. At Eurocentral, Amazon completed on the 8,547 sq.m. Zenith at a rent of £59 per sq.m. and the 5,202 sq.m. Atlas is under offer. This leaves Vertex at 11,985 sq.m. as the only vacant building, but it will be joined shortly by the Colossus buildings at c. 8,733 sq.m. each as Wincanton rationalises. There are a number of active requirements within the big box sector.

In East Central Scotland there were no further new industrial developments completed within the last six months and only one projected to be on site in 2016. While there are developers willing to enter into design-and-build projects, which would be a catalyst for them to potentially speculate various phases of a development, they do require a minimum lease commitment of 15 years.

This shortage of new quality stock, particularly for occupiers with mid-range requirements of 464 – 1,393 sq.m., should lead to forward funding of new developments, however this has yet to materialise as a market cycle.

The speculative development by C&W Assets at West Edinburgh Business Park, South Gyle, completed in 2015. It attracted strong enquiry levels from completion and is now encouragingly 50% let, with a recent letting to MCL Create Ltd (1,227 sq.m.) at £81 per sq.m.

Investor appetite in the industrial sector remains positive, underpinned by the restricted supply of good quality available space with rental growth now widespread across all size sectors for properties within prime locations. This momentum should be maintained throughout the rest of 2016.

The acute shortage of prime available space has witnessed landlords seeking to maximise the situation by holding out for longer lease terms with no break options. In addition incentives continue to be reduced and rental rates continue to increase from one transaction to the next.

The development cycle for new accommodation is at least 12 months behind the market which, given robust levels of occupier demand, will continue to impact positively on rental growth.

Although manufacturing output remains stagnant, there is positivity from a wide variety of industrial sectors including distribution and logistics, data centres, service centres, trade and e-commerce all contributing to economic growth and take-up.

Owner-occupiers are being priced out of prime stock and are now turning their attentions to secondary accommodation and in some cases are acquiring properties that need an element of refurbishment, the majority of this accommodation having being built in the 1970’s and 1980’s and by the public sector.

Landlord refurbishments include Standard Life Investments at Bankhead Industrial Estate, Sighthill; Royal London at Seafield Industrial Estate, Edinburgh; Dunnotter Estates at Pitreavie Business Park in Dunfermline; and London & Cambridge at Middlefield Industrial Estate, Falkirk.

In prime locations, mainly within Edinburgh and the immediate surrounding area, rental levels have increased for prime space within the last six months and range between £80 and £86 per sq.m. for units of up to 1,070 sq.m.

Notably over the past six months, tenants with lease events as far as 12 months in advance are looking to engage with their landlord to discuss their longer term intentions and lease extensions. In order to maximise incentives and keep rental levels at a market rate they are prepared, in some cases, to commit to longer leases.

There have been a number of notable transactions within Edinburgh: following Peveril Securities’ acquisition of 7Hills Business Park, Bankhead Crossway South, Sighthill Industrial Estate, Unit 2 (873 sq.m.) has been let at £86 per sq.m. Remaining land within the development continues to attract strong interest from distributors and trade counter occupiers, with the landlord due to consider their development strategy within the next few months; Stevenswood Ltd has committed to Unit 2 Catalyst Trade Park, Sighthill (550 sq.m.) for a 10-year period at £80 per sq.m.; on the south side of Edinburgh city centre, Kiltane Retail Ltd has leased the extensively refurbished 254/256 Causewayside (853 sq.m.) from Ross Motors at £75 per sq.m.; Jewson, part of the Saint-Gobain Group, extended their lease at 15-25 Ratcliffe Terrace, Edinburgh (1,760 sq.m.) for an additional 10-year term at £74 per sq.m.


Address Size OccupierUnit A, Eastpoint, Righead Industrial Estate, Bellshill

2,846 sq.m. Nationwide Platforms

Unit 4 Imperial Park, Linwood, Paisley 1,858 sq.m. Supply Technologies

Unit 3 Sentinel Court, Atholl Avenue, Hillington

1,864 sq.m. Steder Group (UK) Ltd

195 Scotland Street, Glasgow 4 hectares Zephyr (Scotland) Ltd

Larger industrial deals in the West of Scotland over the last six months include:

12


Address Size Occupier7 South Gyle Crescent Lane, South Gyle, Edinburgh

1,328 sq.m. JC Decaux

West Edinburgh Business Park, South Gyle, Edinburgh

1,227 sq.m. MCL Create Ltd

Unit 1 Firth Road, Houstoun Industrial Estate, Livingston

2,280 sq.m. Lareine Engineering Ltd

Unit 5 Buko Business Centre, Ashley Road, Glenrothes

717 sq.m. Bay Solutions Scotland Ltd

9 Craig Leith Road, Broadleys Business Park, Stirling

3,775 sq.m. Blue Group

Block 24 Kilspindie Road, Dryburgh Industrial Estate, Dundee

3,775 sq.m. JF Kegs Scotland Ltd

Larger industrial deals in the East of Scotland over the last six months include:

On the east side of the city, Retail Home Stores has taken the extensively refurbished Unit 9 Eastern Industrial Estate, Newcraighall (468 sq.m.) owned by South Yorkshire Pension Authority for a new 10-year term at a rent of £86 per sq.m.

Midlothian, specifically Bilston Glen Industrial Estate, continues to outperform. Recent deals include: Pentland Components committing to the last remaining units (464 sq.m.) at C&W Assets’ speculative Phase 2 development on a new 10-year term at £70 per sq.m.; Unit 1 Dryden Vale (238 sq.m.) to HSS at £70 per sq.m.; and Stevenswood Ltd leasing Unit 20 and 21 Dryden Vale (478 sq.m.) at £70 per sq.m.

The occupancy levels in West Fife continue to remain high with the more well-established estates, such as Belleknowes Industrial Estate, Inverkeithing and Rosyth Europarc, sustaining full occupancy. Central Fife (Glenrothes, Markinch and Kirkcaldy) has seen higher vacancy rates due to over-supply of older manufacturing premises, significant company closures and the problems relating to the oil and gas sector. Reduced vacant industrial rates relief will put additional pressure on stock, which in some cases could lead to demolition of older, larger buildings.

The average quoting rents for buildings above 2,322 sq.m. in Fife are £16 – £32 per sq.m. Recent transactions in Fife include: Unit 5 Buko Business Centre, Ashley Road, Glenrothes (717 sq.m.) let to Bay Solutions Scotland Ltd at £27 per sq.m. and the former Kingdom Services site at Halbeath, Dunfermline sold to Fife Council.

Within West Lothian, the sentiment is positive with limited supply, steady rental growth and high levels of take-up reported. At Inchwood Business Park, Bathgate, a speculative development by C&W Assets was completed in 2015 and the last remaining unit is now under offer. Previous rents on the estate have achieved £70 per sq.m. Secondhand deals within West Lothian typically range

between £43 – £48 per sq.m. Recent transactions include: Pet Planet has recommitted to Unit 4 Kingsthorne Park, Houstoun Industrial Estate (2,470 sq.m.) at £46 per sq.m. and Unit 1 Firth Road, Houstoun Industrial Estate, Livingston (2,280 sq.m.) let to Lareine Engineering Ltd with a quoting rent of £43 per sq.m.

The industrial market in Aberdeen has once again experienced a challenging six months with the price of Brent Crude Oil dropping to $28 per barrel, the lowest since 2003. The oil price has risen since then and at the time of writing is above $40 per barrel, but this is not significant enough to generate increased activity in the oil and gas sector and consequently, the city’s industrial property sector.

Industrial take-up in the last six months totals 31,255 sq.m., which represents a 10% increase on the previous six months. The number of deals completed has risen from 28 to 40, a 43% increase. The sentiment in the market place, however, does not reflect this rise and a number of deals that have been negotiated over the last 9-12 months happen to have concluded within this six month review period.

Take-up increased for units below 929 sq.m., most notably for units between 186 – 464 sq.m. where activity is up by 90%. Take-up for smaller units of 0 – 185 sq.m. is up 45% and for units of 465 – 929 sq.m. by 40%. Larger industrial premises appear to be more difficult to lease as take-up for premises in excess of 930 sq.m. is down by 22%, despite an increase in supply.

Transactions larger than 930 sq.m. include: Unit 7B at ABZ Business Park, Dyce to Aramark (1,718 sq.m. + yard); Unit 2, Denmore Place, Bridge of Don to J2 Subsea Ltd (1,188 sq.m. + yard); and Woodside Road, Bridge of Don to Thistle Windows & Conservatories Ltd (2,915 sq.m. + yard).

Supply has increased in the last six months from 79,747 sq.m. to 85,560 sq.m. which represents an 8% increase.

13

The number of properties has risen from 82 to 92, a 12% increase. Supply is up across all size ranges with the exception of 186 – 464 sq.m. where it is down by 35%, due to the high number of transactions being carried out in this size bracket.

Rental levels in the Aberdeen industrial market have remained stable, with new build rents remaining at £97 per sq.m. for industrial accommodation, £188 – £194 per sq.m. for offices and £19 – £21 per sq.m. for secure concrete yards. It has most certainly changed from a landlord’s to a tenant’s market, as shorter term lease commitments and incentives are now having to be offered.

Despite it being a more challenging market for developers and landlords, a number of developers across the city have still commenced speculative industrial development projects. These are: The Core, Bridge of Don by Mountgrange comprising warehouse (1,951 sq.m.), offices (557 sq.m.) and yard (3,035 sq.m.); Aberdeen Gateway Business Park, Cove by Muir Group comprising warehouse (929 sq.m.), offices (418 sq.m.) and yard (929 sq.m.); and 25 Silverburn Crescent, Bridge of Don by Nu-Style Products Ltd comprising warehouse (540 sq.m.), offices (372 sq.m.) and yard (207 sq.m.).

It is expected that no further speculative developments will be built until such time as some of the existing new builds and those under construction are occupied and lease lengths return to 10+ years. Interestingly, active requirements are still following the new-build stock and will most likely result in new transactions, but on terms more favourable to the tenant than experienced in recent years.

In the largest industrial requirement in recent years, Amazon has signalled their intent to open a new depot in Dundee. Although details of the delivery centre are yet to be released, suitable premises have been identified and negotiations are at an advanced stage.

Elsewhere, Craft beer brewer 71 Brewing is in the process of converting an industrial warehouse at 36-40 Bellfield Road (669 sq.m.); Hawkhill Brewery Company opened within refurbished accommodation at Sugarhouse Wynd (170 sq.m.); Nortruck Services Ltd has taken Units 6 & 7 Ballinghall Industrial Estate, Brewery Lane (373 sq.m.); and JF Kegs Scotland Ltd leased industrial accommodation within Block 24 Kilspindie Road, Dryburgh Industrial Estate (968 sq.m.).

Grangemouth-based Jarvie Plant Hire is investing in a new purpose-built depot on a 1 hectare site at Dunsinane Avenue, just off Dundee’s Kingsway, and trampoline centre Ryze is set to bring a £3 million indoor park to an undisclosed location in Dundee.


Address Size OccupierUnit 7B, ABZ Business Park, Dyce 1,718 sq.m. + yard Aramark

Unit 2, Denmore Place, Bridge of Don 1,188 sq.m. + yard J2 Subsea Ltd

Woodside Road, Bridge of Don 2,915 sq.m. + yard Thistle Windows & Conservatories Ltd

Wellington Road/Greenwell Road, Aberdeen

2,055 sq.m. on a 1 hectare site Lidl

Larger industrial deals in the North of Scotland over the last six months include:

Number of industrial transactions in Scotland

2012 2013 2014 2015 2016 (Q1)

1000

0

14

Retail and Leisure

Glasgow has seen activity on prime Buchanan Street with a new letting to Swatch within the former EE premises at no 28, and Massimo Dutti has secured the former USC space at no. 64 as its first store outside London. Forever 21 is to close its flagship store at 185 Buchanan Street, however the unit has since been let to H & M. New arrivals on the expanding restaurant scene are Byron with their new restaurant on West George Street and Miller & Carter with their premium steak offering within the former Post Office at St Vincent Street.

Edinburgh city centre’s largest investment in a generation, Edinburgh St James, is underway. TH Real Estate’s £850 million redevelopment will comprise more than 93,000 sq.m. of shopping, leisure, hotel and residential accommodation. Anchor tenant John Lewis Partnership will continue to trade throughout the redevelopment. Some existing occupiers of the St James Centre are anticipated to open in alternative city centre locations, with potential to relocate back into the new centre in improved accommodation. The other main addition to Edinburgh’s landscape is Standard Life Investments/Peveril Securities’ St Andrew Square development where the landlords will add to earlier lettings to TK Maxx, Busaba Eathai and Drake & Morgan with deals now completed with Dishoom, STK Rebel and Big Easy. On Princes Street, shoe retailer Skechers opened at no 79 and Card Factory took 119a (the former Phones 4 U shop).

Out-of-town, Next plc has secured a letting for their largest Scottish store at Peel Retail Park, Straiton, totalling 7,400 sq.m., to relocate from their existing 1,400 sq.m. unit which opened just three years ago.

In Dundee, the influx of new restaurants and bars continues apace with independent brewer Innis & Gunn opening new premises: The Beer Kitchen, at 10 South Tay Street (343 sq.m.); and Rosemount Taverns lodging an application for a new eatery at 19 Reform Street (165 sq.m.) replacing Costa which is relocating to 2-6 Murraygate (365 sq.m.). Cosmo Molinaro is opening a

high end bar and restaurant at 172 Nethergate (1,057 sq.m.) and Frankie & Benny’s plan to open their first Dundee restaurant within the Overgate Centre (352 sq.m.). Schuh has relocated to larger premises and Tiger Stores opened their first Dundee outlet both within the Overgate Shopping Centre. Fashion & footwear retailer Size? has taken 82 High Street and The Entertainer toy shop plans to open a store within the Wellgate Centre.

Within the Bon Accord Shopping Centre, Aberdeen, mobile phone provider EE is relocating to a larger store and stationery retailer Smiggle is taking a unit. Adjacent to the centre at 139 George Street, fitted kitchen retailer Magnet is opening a store. On Schoolhill, fashion and homeware store Oliver Bonas opened in the site of the former Littlejohns restaurant. At the Trinity Centre recent lettings have been announced to Northern Diamonds and Warren James in addition to Chopstix. Union Square has attracted a Byron restaurant and All Bar One announced it is to open within Muse Development’s Marischal Square scheme.

Orion Capital in East Kilbride reports a further two restaurant units under offer with lettings underway to a buffet style occupier and a coffee chain. A planning application has been lodged by London & Scottish Investments for a £40 million retail development at Peel Park, comprising 10,000 sq.m. of retail space in 12 units, plus two 334 sq.m. drive-thru units.

At Silverburn Shopping Centre, Bella Italia recently opened a restaurant and Tortilla is opening its first restaurant in Scotland. Additional lettings have been concluded to Tempo Tea Bar and stationary chain Smiggle.

At Inverness Retail Park, British Land has re-geared a lease with Boots, along with recent new lettings to Frankie & Benny’s, Nando’s and Bella Italia within the former Comet space. It is understood that another retailer is under offer on a further 500 sq.m. unit. At Inshes Retail & Leisure Park, B&M has taken space within a newly constructed 2,136 sq.m. unit alongside a McDonald’s drive-thru.


Scotland’s retail property market is active and focused on re-energising, expanding and diversifying existing prime locations, generating the first rental growth for four years.

15


Ediston Real Estate is in the final phase of Gallagher Shopping Park in Port Glasgow with pre-lets to M&S Simply Food, Next, TK Maxx, B&M and Watt Brothers.

In Dunfermline, toy shop The Entertainer opened a store within the Kingsgate Shopping Centre and at Fife Leisure Park a drive-thru Starbucks has opened and Marston’s Inns is building a 27-bedroom hotel to sit beside its restaurant.

At Fife Central Retail Park, Kirkcaldy an M&S Simply Food opened in the former Next unit (who previously opened a Next superstore elsewhere on the park).

At the Howgate Centre in Falkirk, Glasgow-based Watt Brothers plan to open a new store in the former HMV and Argos units.

New entrants to the out-of-town retail market include: Tapi Carpets & Floors who have a target of 12-14 stores in Scotland and are well underway with recent acquisitions; Jolleyes Petfood Superstores opened their first store at Inveralmond in Perth; and HomeSense (part of the TK Maxx family) opened their first store at Fort Kinnaird, Edinburgh. Other acquisitive occupiers in this market include Next, with their planned openings at East Kilbride, Dundee, Port Glasgow and Straiton; B&M and Home Bargains have also been busy acquiring sites in Edinburgh, Aberdeen, Fraserburgh, Musselburgh, Falkirk, Kilmarnock and Larkhall. Warren James has also been involved in acquisitions in Kilmarnock, Ayr, Braehead, Glasgow Fort, Hamilton and Paisley with a further four shops currently under offer. Aldi, DFS, The Range, Wren Living, Oak Furnitureland, Sofaworks, Nike, Pets at Home, TK Maxx, Sports Direct and Smyths Toys also have plans for expansion.

The review of market activity above confirms that the retail sector remains focused on prime streets, malls and parks, with a side order of restaurant deals. This activity is helping to re-energise and expand existing locations rather than driving a new wave of development (other than at the major Edinburgh St James).

The number of High Street voids are at their lowest level for four years as the numbers of closures decline. Last year’s closures were most prevalent in “money shops” and men’s clothing. In total 280 shops closed in Scotland against 221 new openings, showing an overall reduction of 59 shops compared with 66 in 2014. (PwC/Local data Company).

There have been fewer high profile failures in the retail market although at the time of going to print BHS and Austin Reed were entering administration. One casualty, Brantano, has been part-saved under the Brantano banner, Poundland has reportedly acquired 20 of these sites and intends to also roll out a further 60 stores per year for the next three years.

Although closures have now levelled off, it is important that planning policies build on this modest improvement. In some cases, however, there is a disconnect between planning policies, which lag behind the market, and the key aim to rejuvenate the high street by reducing voids and increasing footfall. It is therefore important for Councils to take a pragmatic approach when dealing with proposals, for example for Class 3 food and drink uses, which will make use of vacant retail property but do not fully accord with restrictions to Class 1 shops. It is understood that certain Councils are now re-assessing this specific issue to increase footfall in areas where there is a significant level of vacant Class 1 units or where there is evidence of market decline, notably; longer voids, decrease in rent and poorer covenants.

Ryden’s prime retail rent index (covering Scotland’s top twenty shopping locations, see chart below) has seen a rise after remaining static since 2012. The rises have been, as expected, in the prime retail locations of Glasgow and Edinburgh.

Retail rent index

150

MAR-06 MAR-07 MAR-08 MAR-09 MAR-10 MAR-11 MAR-12 MAR-13 MAR-14 MAR-15 MAR -160

100

50

Retail index CPI

Source: ONS/Ryden. Index baseline of 100 is at 2015.

16


Investment

There is no doubt that the forthcoming EU Referendum in June, allied to the political situation in Scotland, has been a contributing factor to the slowdown. The uncertain outlook appears to have been of particular concern to UK institutional investors and in turn their activity has been very selective. The hangover from Scotland’s Referendum in September 2014 continues to linger, as fund managers carefully consider their weightings to Scotland and also apply a perceived risk premium to new propositions north of the border.

The political landscape has not deterred a more select group of UK and overseas investors. The majority of activity has been in the office sector and there is no doubt that the cities are the subject of increasing international interest. Robust occupational markets and a discount to prime investment opportunities in other UK Regional centres have been an appeal. The shortage of Grade A office stock in both Edinburgh and Glasgow presents a strong case for real rental growth in the short to medium term. Conversely, there is increasing supply in Aberdeen which, coupled with the oil industry downturn, will generally limit rental growth to leases with built-in uplifts.

Yields in Scotland, excepting Aberdeen, have remained relatively firm and in some instances, pricing for prime product has improved. All Property Total Returns for Scottish property for the four quarters to December 2015 were recorded at 9.3%, which represents a decrease on the equivalent period to December 2014 of 12.4% and is below the UK All Property Return of 13.1%.

Office

Investor demand for offices in Scotland has been largely focused towards Edinburgh and Glasgow during the last six months, with very little happening in Aberdeen due to the rapid reversal in that market. Inevitably, activity has been influenced by the comparative strength of occupier demand and prospects for rental growth. Edinburgh leads the way in that regard with the recovery now well established and Glasgow has also seen an improvement. Conversely, Aberdeen is busy weathering the storm created by the global downturn in the oil industry which is depressing demand and increasing the supply of vacant space.

While all three cities have seen substantial high quality investment product come to the market, sellers have needed to look overseas to find buyers as there has been very little interest from the UK institutions. This has been the situation for some time now and the approaching Brexit vote has added to the wait-and-see strategy adopted by many fund managers. There is still a weight of money seeking product in the private investor arena, although again this is largely confined to Edinburgh and Glasgow.

The headline sales completed in the last six months in each city are:

Glasgow has seen the off market sale of 2 West Regent Street to TH Real Estate/Warburg-HIH for £31.5 million. This Grade A multi-let office building changed hands at a yield of 5.84%. Kennedy Wilson was the seller.

In Edinburgh, the standout transaction was Deka Immobilien’s purchase of the Atria buildings in the city’s Exchange district from Edinburgh City Council for a price of £105.25 million. Atria 1 and 2 provide some of the best office space in the capital and with a WAULT in excess of 15 years the price provides the German investment company with a net initial yield of 5.35%.

2015 was a relatively strong year for the Scottish commercial property investment market. However in 2016 the pace of the market has yet to pick up. There is a perception that the market has peaked in the investor hotspots, in particular London and the south-east.

17


Aerium’s Glenn Arrow UK Property Fund sold the Windsor Portfolio for £365 million to Mapletree Investments from Singapore, which included the 11,660 sq.m. iQ building on Justicemill Lane, Aberdeen, tenanted by Wood Group and Centrica. The portfolio included prominent buildings in Bristol and Manchester and the price paid reflected a blended yield of 5.7%.

The volume of office investment transactions is expected to fall over the next six months, with a quiet lead-in to the Brexit vote in June followed by the summer period. That said, there are some substantial office buildings available in Scotland which could sell in the coming months. Examples include Exchange Place in Edinburgh and CityPark 1 in Aberdeen, each of which comes with a price tag in excess of £80 million.

Yields for prime stock in Edinburgh and Glasgow are in the 5.25% – 5.75% range. Aberdeen is harder to estimate due to the lack of recent transactions, although the best product in the city might sell for around 100 basis points cheaper.

Total Returns for Scottish office property for 2015 were 9.3%, a fall from 13% in 2014, mainly as a result of Capital Growth reducing from 6.3% to 3.4%. In comparison, Total Returns for UK offices for 2015 comprised 17.7%, falling from 22.7% in 2014.

Address Property Purchaser2 West Regent Street, Glasgow 7,121 sq.m. multi-let Grade A office building.

Let to Colliers, FanDuel, Willis and Digby BrownTH Real Estate/Warburg-HIH for £31.5 million (5.84%)

100 Bothwell Street, Glasgow 9,465 sq.m. single-let office building. Let to Student Loans Company Ltd until Dec 2023 with tenant break option December 2018

Oval Real Estate for £25.55 million (7.56%)

33 Bothwell Street, Glasgow 2,543 sq.m. multi-let office building. Let to Chase de Vere, Turner & Townsend and Starbucks

Cordatus Real Estate for £6.98 million (6.62%)

Ca’d’oro Building, Gordon Street, Glasgow

4,403 sq.m. multi-let Grade B retail/office. Tenants include Harper Macleod, Atos and Co-operative Group

Private overseas investor for £14.1 million (6.5%)

Atria One & Two, Edinburgh 18,799 sq.m. prime Grade A office buildings. Multi-let to tenants including Alliance Trust, Brewin Dolphin and PwC. WAULT of approx. 16 years (14 years to breaks)

Acquired by Deka Immobilien for £105.25 million (c. 5.3%)

Standard Life House, Edinburgh

HQ office building extending to 25,521 sq.m. Leased to Standard Life until July 2031

Clients of HSBC Private Bank for £93.75 million (c. 5.09%)

Citymark, Edinburgh 9,486 sq.m. single-let city centre building. Let to Bank of Scotland plc wholly occupied by Lloyds Banking Group. Lease expiring January 2026

Trinova Real Estate for £43.65 million (c. 5.54%)

Sainsbury’s Bank, Edinburgh Park

Out-of-town HQ building entirely let to Sainsbury’s Bank until Sept 2029 (tenant break option September 2024)

CCLA for £19 million (c. 6.31%)

iQ Building, Justicemill Lane, Aberdeen

11,650 sq.m. office building let to Centrica and Wood Group

Mapletree Investments as part of a £365 million portfolio

34 Carden Place, Aberdeen 191 sq.m. single let townhouse office with four years unexpired

Private local investor for £852,500 (6.76%)

Office property investment deals include:

18


Industrial

The announcement by the Scottish Government that void rates would be imposed on industrial property commencing 1 April 2016 came as a nasty shock and has further postponed recovery in the development market.

Activity levels have been low over the last six months, with no institutional grade estates changing hands and muted institutional demand. Unfortunately the Scottish market is seldom able to provide modern estates in the desired lot sizes of £10 million or larger.

Until new development proceeds, existing industrial landlords should continue to enjoy good performance on their assets, with low vacancy levels, steady occupier demand and pressure on rents becoming the norm across prime Central Belt locations.

The absence of prime transactional activity coupled with the shortage of institutional buyers currently makes it difficult to gauge exactly where prime yields are. For the time being, the range given in our previous Review of 6.75 – 7.25% is retained.

Activity in the single let sector of the market has been steady, with a range of UK and overseas buyers taking advantage of some attractive returns for medium and long term income assets. With yields of 6 – 6.75% achievable, this sector provides good value in the context of a market with negligible availability of modern stock.

Total Returns for Scottish industrial property for 2015 were 13.2%, a fall from 18% in 2014, mainly as a result of Capital Growth reducing from 10.3% to 6.1%. In comparison Total Returns for UK industrial for 2015 comprised 16.8%, falling from 23.3% in 2014.

Address Property Purchaser40 Cambuslang Road, Cambuslang

2,591 sq.m. modern single let industrial unit let to Hydrasun Ltd on FRI terms expiring 2031, with tenant break option 2026. Passing rent of £174,319 pa

Private investor for £2.38 million (c. 6.9%)

25 Coddington Crescent, Eurocentral

12,842 sq.m, purpose built facility. Let to Scottish Power UK Plc until 2022. Passing rent of £660,000 pa

South African investor for £8.75 million (7.1%)

Baillieston Distribution Centre, Glasgow

16,422 sq.m. multi-let industrial estate across 34 units. Let on short to medium term income. Six vacant units

Rockspring Property Investment Managers for £5.82 million (c. 8%)

Belgrave Central, Bellshill Industrial Estate, Bellshill

2,305 sq.m. modern multi-let estate across 13 units. Let on short to medium term income

Buccleuch Property Group for c. £1.5 million (c. 8%)

Stenhouse Mill Wynd Industrial Estate, Edinburgh

Multi-let industrial estate. Extends to c. 5,870 sq.m. Tenants include Travis Perkins, Chubb and Rexel Senate. WAULT of approx. 6.5 years to expiry (4.98 to breaks)

Telereal Trillium for £5.1 million (c. 7.6%)

The Print Works, East Telferton Industrial Estate, Edinburgh

2,345 sq.m. purpose built printing/distribution facility leased to Scottish Widows Services Ltd until December 2026. Tenant break option December 2023. Fixed uplifts of 3% pa

London Metric for c. £2.45 million (c. 8%)

Units 2A, 2B & 2C Pentland Industrial Estate, Loanhead

Two self-contained industrial units extending to a total of 4,130 sq.m. leased to The BSS Group and Nationwide Crash Repair Centres

Private investors for £1.65 million (c. 8.61%)

Ground Lease Portfolio, Altens and East Tullos, Aberdeen

14 sites totalling 11.88 hectares in two industrial estates with a WAULT of 84 years

Aberdeen Asset Management for £16.05 million (3.6%)

Badentoy North, Portlethen 1,700 sq.m. new industrial unit let for 20 years to KCA Deutag Drilling Ltd

ABF Pension Fund for £5.4 million (5.97%)

Kirkton Drive, Raiths Industrial Estate, Aberdeen

15 year sale and leaseback of a 4,140 sq.m. specialist industrial unit to Helix Well Ops UK Ltd

Aprirose for £7.65 million (7.46%)

Industrial property investment deals include:

19


Retail

The retail investment sector has continued its steady improvement, reflecting the continued recovery in the occupational market. Increased demand from a wider investor base allied to limited prime/strong secondary product and an improving occupational story in certain sub sectors has widened investors’ focus. Although prime and secondary space in strong regional centres remain the principal targets, there are signs that investors are willing to embrace more risk. With limited prospects of yield compression to drive up prices, opportunities to actively manage or re-position an asset are now in favour as investors seek to deliver target returns.

The shopping centre sub-sector of the market is particularly polarised, with dominant and strong secondary centres the most sought after while poor secondary and tertiary continue to suffer from excess space. Rental growth across the sector has been negligible. Prime activity has been limited however recent news that TH Real Estate has secured co-investors for the proposed Edinburgh St James is hugely encouraging. The scheme has the potential to elevate Edinburgh’s status as a retail centre significantly. The proposed sales of the Gyle (West Edinburgh) and Ocean Terminal (Leith) will offer strong market indicators; each has its challenges and demand may be impacted by the imminent EU Referendum.

In a UK context the retail warehouse sector (excluding central London shops) was the best performing retail sub-sector last year. The sector has enjoyed a growth in footfall and in conjunction with sales growth this has

resulted in falling vacancy rates across the sector. There has been an uptick in occupier demand across convenience, comparison and food and beverage sectors. The improvement in the UK housing market has also helped drive demand for DIY and household goods. Despite record volumes within this sector having been transacted across the UK, Scotland has had limited activity within this sub-sector over the Review period. The retail warehouse sector may well offer buying opportunities within Scotland over the next six months.

Investor appetite for prime high street opportunities in Glasgow and Edinburgh has increased and now has a more international flavour than ever before. Larger and well configured assets command a premium. With high street retail rents having rebased and in certain instances showing signs again of improvement, demand for prime and the best secondary space has driven prices up (and yields down). Rental and capital growth across many of the smaller centres and less prime locations is still some way off as these sub-sectors continue to wrestle with over supply and over-renting. However, a well let shop in a good regional centre or secondary pitch continues to appeal to the private investor market and rightly so, as it delivers an attractive yield of 7% plus in many instances and leaves other investment alternatives in the shade.

Total Returns for Scottish retail property for 2015 were 7.3%, a fall from 10.9% in 2014, mainly as a result of Capital Growth reducing from 5% to 1.8%. In comparison Total Returns for UK retail for 2015 comprised 9.7%, falling from 14.2% in 2014.

Address Property Purchaser35-39 Gordon Street, Glasgow Prime retail unit let to Steamer Trading Limited on a new

15 year FRI lease expiring 2030 at an initial rent of £230,000 pa (£126 psf Zone A)

Private investor for £3.85 million (5.63%)

Shawlands Shopping Centre, Shawlands, Glasgow

10,978 sq.m. mixed retail, leisure and office scheme, tenants include Pure Gym, J D Wetherspoon, Poundstretcher, Boots and Sainsbury’s

Ediston – final price subject to NDA. Quoting price – £8 million (8.93%)

The Townhouse, Nelson Mandela Place, Glasgow

2,624 sq.m. leisure unit situated in a prime location, let to Thai Leisure Group Ltd on FRI terms with c. 16 years unexpired. Passing rent of £300,000 pa with RPIX uplifts every five years

Spanish investor for £5.95 million (4.75%)

24-28 Frederick Street, Edinburgh

Mixed use (retail, leisure, offices) city centre property of c. 7,147 sq.m. Tenants include Vision Express, Thomas Cook (sub-let to Co-op Food Group). WAULT of c. 6.5 years

St Bride’s Managers for £7.55 million (c. 6.51%)

78/79 Princes Street and 4/18 Hanover Street, Edinburgh

Prime corner mixed use city centre block extending to c. 2,420 sq.m. Fully-let to tenants including Signet Group plc, JD Sports Fashion plc, Yo! Sushi UK Ltd and Virgin Media Ltd. WAULT of approx. 6.14 years

GLL Real Estate Partners for £18.95 million (c. 5.15%)

125 Union Street, Aberdeen 290 sq.m. unit shop let to Cancer Research UK with five years unexpired

Prestigic Holdings for £924,000 (8.46%)

Retail property investment deals include:

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2008 2009 2010 2011 2012 2013 2014 2015 2016 (Q1)

75

0

Investment tracker:Number of transactions over £1 million in Scotland

Outlook

Despite the uncertain outlook there continues to be a weight of capital from UK and overseas investors seeking suitable prime, core-plus and value-add property investment propositions. Notwithstanding the depth and cross section of interest, it is envisaged that investors will remain very selective and pricing will remain fairly stable. With the prospect of yield improvement in the short to medium term thus limited, investors will increasingly focus on income growth and asset management initiatives to deliver returns.

Institutional investor activity in the lead up to the EU Referendum is likely to be subdued and this continued malaise may provide an opportunity for overseas and other UK investors in the short term. In the event that the UK votes to stay in the EU the market will enjoy a “bounce” and some of the caution expressed by UK institutional investors towards Scotland may dissipate. As strong regional markets, both Glasgow and Edinburgh would be set to benefit from an uptick in institutional demand and activity.

In due course, the limited supply of suitable investments may prove to be an issue, and a number of more opportunistic investors may focus on the development sector as a way of securing product and achieving an acceptable return. Speculative involvement alongside contractors and developers may materialise, particularly in relation to office, warehouse and mixed-use propositions.

Investor demand for alternative sectors such as long income, student, hotel and serviced apartment will continue to be positive. Activity may also emerge in the PRS (build-to-rent housing) sector with developers actively seeking sites for schemes in Edinburgh and Glasgow, although it is anticipated that funders will be somewhat cautious when assessing the viability of the first developments of this type.

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Edinburgh7 Exchange Crescent Conference Square EH3 8ANTel: 0131 225 6612

Glasgow130 St Vincent Street G2 5HFTel: 0141 204 3838

Aberdeen25 Albyn Place AB10 1YLTel: 01224 588866

Leeds3rd Floor Carlton Tower34 St Paul’s Street LS1 2QBTel: 0113 243 6777

DundeeUnit 20 City QuayCamperdown Street DD1 3JATel: 01382 227900

ContactsBill Duguid, Managing [email protected]

Dr Mark Robertson, [email protected]

Karen Forsyth, Research [email protected]

Ryden is the trading name of Ryden LLP, a limited liability partnership registered in Scotland

We are grateful for the assistance of CoStar and MSCI/Investment Property Databank (IPD).

www.ryden.co.uk

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