2012 saw an improvement in performance from the preceding year, however the market was certainly much flatter over the summer last year, and patchy throughout the year generally. This year activity has been much more consistent throughout the year, confidence is growing and in the latter two quarters of 2013 it seems clear that the appetite for commercial property as an investment is returning.
This is a useful point to reflect on why the market picked up in 2013, and also to take a hesitant peek at what 2014 might hold.
George Osborne delivered his Autumn Statement last week in the midst of undoubted signs of economic recovery in the UK. The Office for Budget Responsibility is currently projecting a growth forecast of 1.4% for 2013, revised up from the previous figure of 0.6%. Retail sales and GDP have risen in the latter half of the year, whilst unemployment has fallen, and certainly the current recovery appears to be the strongest upturn since the recession started in 2008/2009. Current forecasts project more positive growth for 2014, and more positive still for 2015.
The improving economic picture has lead to an increasing occupier demand over the course of the year, which in some sectors has way outstripped supply. Occupier demand / activity is a key factor that has underpinned improved commercial property performance across all sectors, in particular office, industrial and retail.
As we all know, the Edinburgh office market has been very active, particularly for Grade A space, and 2013 saw the biggest take-up of office space in Edinburgh for almost a decade. Another well known fact is that although there are now development schemes in the pipeline, there is very little new quality space set to come onto the market in Edinburgh during 2014.
Aberdeen too has seen very high office demand over the year, but again there has been a lack of supply. In contrast to the Edinburgh market, however, the lack of existing space has kick-started development very quickly, with several new office development schemes recently completed or currently underway.
The Glasgow office market has improved throughout 2013. It has been more balanced in terms of supply and demand than Edinburgh or Aberdeen, but Glasgow did start the year weaker and is finishing the year comparatively stronger with a number of speculative office schemes currently underway. Activity has been strong in terms of new lettings, and there has also been a considerable amount of refurbishment of smaller office premises.
Whilst the office market has generally performed the best in Scotland, the industrial and retail markets have not been far behind. Aberdeen has seen a number of speculative industrial developments as the North Sea oil and gas sector continues to fuel growth. The Glasgow and Edinburgh industrial markets have also performed well, as have Dundee and Inverness. The retail market has, predictably, picked up in line with the UK economy improving.
Development and investment
Property values in Scotland are still at a low, so the increase in occupier demand and activity, and the rental markets generally, means that many developers currently view the Scottish market as full of opportunities. The same is true of investors, and throughout 2013 the weight of money chasing institutional investments has ballooned. There is, however, still a lack of stock of that quality, partly because of the slow development market in recent years, so prices are being driven up.
At the other end of the market, 2013 has also been a year where some of the banks have finally started packaging up chunks of their stock and selling it off. These deals, some of which have been huge in terms of capital value, have inevitably resulted in spikes of activity, but more importantly it means that these properties will now ultimately end up in the hands of experienced asset managers who can work through the portfolios to add value. In many cases that will mean management, refurbishments, new tenants and onward sales, all of which are good news for the market as they get the circulation going again.
All in all, 2013 saw a very respectable amount of transactional activity, with some good lettings, some exciting new developments and a number of decent sized investment acquisitions. Many of our commercial property clients at Morton Fraser have had a very busy and successful year, and it can only be hoped that this will continue into 2014. On current evidence it looks like it will.
If the projections for economic growth are about right then that is good news for next year. A continued lack of supply, particularly in the Edinburgh office market but also across the industry generally, will inevitably lead to new development schemes coming on stream to meet occupier demand.
2014 is also - how could we forget - the year we decide on independence. There was certainly a fear throughout 2013 that the independence debate could have had adverse consequences for the Scottish property market, particularly in the investment market. The impact did not seem to be nearly so negative as first feared, and investment deals continued to happen. Some commentators have argued that this was only because the polls were so clear about the yes vote being a minority that many funds and other investors took the view that independence wasn’t going to happen anyway.
Independence does, however, remain the one big imponderable, and that question will not be answered until Q3 of 2014. Added to that there is the one certainty that we have learned over the last six years which is that nothing is certain. We only need to look back at the recent chaos in the Eurozone to see that events elsewhere can have an immediate and dramatic impact on our own UK economy and, in turn, on our Scottish property market.
Let's finish the year on an optimistic note however, and let's all hope that the fundamentals remain in place to allow the current upturn to continue well into next year.
Thank you to all of Morton Fraser's commercial property clients and contacts who have made this year such a busy and successful one for our firm. Our commercial property team are ahead of target for the year and ahead of where we were last year, and that is thanks to all of those clients who have instructed us throughout the year. Your support is always appreciated.
May you all have a well deserved break over the festive period, and a prosperous and successful 2014.