Commercial Report Scotland Office Market Update

COMMERCIAL REPORT SCOTLAND OFFICE MARKET UPDATE

November 2017

Aberdeen Historically, Aberdeen’s lower exposure to overseas investment, as compared to other UK cities, brings Aberdeen’s office market is set to benefit from the stability to yields. completion of the £750 million Aberdeen Western Peripheral Route which will improve connectivity Edinburgh and bring new businesses to the city. In the first quarter of 2017, the -take up of office Aberdeen’s office take up reached 183,000 sq.ft. in space reached 129,000 sq ft in the city center and a 2016 for new builds only. This was significantly further 84,000 sq ft in out of town market. These below the long term average. It is suggested that take up rates propel the overall market and keep it this slow rate of take up was on account of at par with the five year average. Major deal of shortage of large deals in engineering and energy Quartermile 4 with 22,500 sq ft of space brought sectors which have accounted for nearly three- more encouragement in the market. Also in 2017, quarters of the market over the past four years. the pre letting of 66,000 sq ft at Quartermile 3 One such major deal was PwC acquiring 10,600 boosted the overall market. sq.ft. of space at The Capitol, which after major redevelopment is providing grade A office space in Supply of office space has remained stable with the city center. increasing demand. At the end of 2016, 1.25 million sq ft was available, following the inclusion of space Top rents remain steady at £32 psf in Aberdeen city of One Lochrin Square. This has boosted Grade A center, although with attractive rent free periods supply to 333,000 sq ft and provided office space for the best spaces available, net effective rents for the city’s growing tech center. In addition to have reduced. Major upcoming projects that will that, known leases for 605,000 sq ft are set to add more office space to the market are Marischal expire between 2019 and 2021. Therefore, occupiers Square that will add 173,000 sq ft of space and The are expected to seek pre lets in the second half of Silver Fin providing 132,000 sq ft of office space. 2017.

Investment Market & Yields Investment Market & Yields

Major deals amounting to £43 million for Lloyd’s Transactional levels for Edinburgh and Glasgow Register boosted office investment. Current levels were reasonably balanced. Acquisition of Exchange of investor confidence lead to an improved market Place 2 and 3 for £36 million and The Tun for £8.3 in 2017. Office yields remain attractive in the million show that property companies remain Aberdeen market and currently stand at 6.75%, particularly active in the market. above the UK regional average of 5.25% .

November 2017

Glasgow

Glasgow city center take up reached 100,282 sq ft in Scottish Cities Outlook the first quarter of 2017. This is largely attributed to an It is forecasted that prominent Scottish markets will influx of engineering firms setting up operations in the reach a collective 1.7 million sq. ft. of office space in city. Mott Macdonald and Wood Group acquired 2017. Thus increasing total supply by 17% as compared 34,515 sq ft and 17,249 sq ft of office space, to 2016. A vast majority of this added space will be respectively. Other deals in the pipeline include DWP’s because of improving Aberdeen market and offer for 80,000 sq ft at 3 Atlantic Quay, which continuing stability in Edinburgh and Glasgow. undergoing large scale renovations. Overall demand is Considering new builds, Glasgow has no upcoming high with large firms, including Scottish Courts, Lloyds developments, however Aberdeen and Edinburgh Bank and Virgin, all looking for office space in the city. have 427,00 sq ft of speculative development under Grade B properties are currently fetching top rents of construction. £30 psf in the city center. With no new builds coming in the market, added pressure will be on refurbished Rental values are expected to remain stead at £30 psf buildings. and £32 psf in Glasgow and Aberdeen, respectively. Edinburugh is forecast to see a 1.5% rise to £34 psf by In mid of 2016, prime headline rents remained at year end. This rent increase is pushed by pre-lettings £29.50 psf with forecasts that prime rent may exceed of new office space coming into the market. £30 over the next year because of constrained supply. Investment enquiries remain strong and multiple deals Investment Market & Yield are in the pipeline in early to mid 2017. However, the Largest investment deal of 2016 was the sale of 2 West markets can be faced with instability with a repeated Regent Street for £31.5 million reflecting a net initial referendum on Scottish independence. But for now yield of 5.84%. In addition to that, The Grosvenor Scottish of markets remain attractive as compared to Building was bought by UBS for £17.85 million other regional cities, and Edinburgh's prime yield reflecting a net initial yield of 6.9%. Notable trend over continues to sit 25-50 bps above that of comparable the past few years has been a growth of international English cities. We see yields holding firm through 2017, investors. For 2017, the midpoint, prime yields were with sustained investor demand from domestic and settled at 5.50%, a level 100 basis points above the overseas buyers. market peak of 4.50%.