RESEARCH

ABERDEEN OFFICE MARKET REPORT SPRING 2018 ECONOMIC OVERVIEW The economy enters 2018 with cause for guarded optimism.

Oil is the city’s main growth driver, and course and the simulator show Aberdeen in early March, Brent crude was trading is further expanding as a centre of at around the US$64.00 a barrel mark, expertise for the oil industry, which allows up by 16% on a year earlier. A recent the city to export specialist knowledge to FEB 2016 poll of 37 oil market analysts conducted other global oil markets. $36.63 by Reuters suggests that prices by The city should also see reduced traffic the end of the year are expected to be congestion, as the new £745 million SEP 2017 around the present level. Price stability Aberdeen Western Peripheral Route is $52.74 would offer certainty to oil firms operating expected to open this year. Over the Aberdeen’s £5m government in Aberdeen, and allow them to plan for medium to long-term, new investment £350m harbour funding to find the future. This improves the chances will support the city’s leisure economy, expansion set to potential new that companies with upcoming lease create 2300 jobs deposits in the with plans for a new Aberdeen FC North Sea expiries might initiate searches for new stadium, and the new £333m Aberdeen office space. Exhibition and Conference Centre, which OCT 2017 is scheduled to open next year. $56.01 The uncertainty surrounding Brexit presents a significant headwind for the North Sea hits WorleyParsons to UK economy. Oxford Economics are ten year high for buy AFW UK Oil & FIGURE 1 new oil projects Gas for $303m forecasting UK GDP to expand by 1.5% Aberdeen office take-up and oil prices in 2018, marginally down on the 1.7% NOV 2017 figure recorded for 2017. 1,200 120 $60.43 Contrary to press reports, new economic 1,000 100 Scottish Oil & The Chancellor opportunities for Aberdeen are emerging, Gas production announced a increased by long-awaited tax particularly in regard to the task of 800 80 2.9% in 2017 break for the decommissioning the first generation of North Sea oil and North Sea oil platforms. Construction 600 60 gas industry 000s sq ft

has begun on the harbour extension $ per barrel 400 40 at Nigg Bay that will allow the city to DEC 2017 claim a share of this new business. Also, $63.61 200 20 the University of Aberdeen and Robert Temporary closure Chrysaor agrees to Gordon University (RGU) are co-operating 0 0 of Forties oil and buy a basket of to offer the world’s first Masters degree gas pipeline pushes fields which account 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 oil prices above for around half of in decommissioning, while RGU has built TAKE-UP (SQ FT) BRENT CRUDE OIL $65 per barrel Shell’s North Sea PRICE (annual average) production for up to a simulator to allow oil company workers $3.8bn (£3bn) to practice well plugging. The degree Sources: Knight Frank Research / Thomson Reuters

JAN 2018 $66.60 FIGURE 2 BP announces two Serica plans 2017 take-up vs 10 year average new discoveries in the expansion in North Sea and plans Aberdeen after 100% to boost production by BP deal 800,000 bpd 80% by 2020 60%

40% FEB 2018 20% $69.71 0%

Golden Globe Shell to redevelop -20% Merchants purchased Penguins field in Statoil House, at the the North Sea -40% Prime Four Business M25 Leeds

Park, for £18.7m Bristol Cardiff Sheffield Glasgow Edinburgh Aberdeen Newcastle London WE Manchester Birmingham Source: Knight Frank Research London City Spot price 1st of each month Source: Knight Frank Research Aberdeen 10-year average: 569,699 sq ft

2 Please refer to the important notice at the end of this report OCCUPIER MARKET With the worst of the Oil & Gas downturn now past and most rationalisation programs seemingly complete, occupier activity showed steady improvement in 2017.

As with previous Oil & Gas cycles, once & Gas sector regarding contract wins and A combination of development the oil price starts to increase and projects new exploration. completions and ‘grey space’ coming are reviewed with the prospect of ramping In terms of supply, levels have remained back to market meant a further rise in up production again, this leads to new at over 2.5 million sq ft over the course vacancy was recorded in 2017. Grade employment, which in turn leads to new of the year with no signs of this figure ‘A’ availability increased to 753,800 sq ft requirements for office space. reducing significantly in the short term. during the year, a total twice that of the Office take-up reached 468,000 sq ft by City Centre offices continue to dominate long-term average. This is the highest year end, a total that, although 18% below supply, accounting for 43% of the market level on record for the city, but this total, the 10-year annual average, reflects a 68% allocation. Marischal Square was the should represent the peak in vacancy with increase when compared to 2016. last of the new developments to reach the development pipeline consisting of practical completion in December 2017. The reported rise was underpinned by proposed schemes only at this time. We are seeing healthy enquiry levels for three large deals. The largest of which Grade A city centre offices that will “soak In 2017, prime headline rents held firm saw 138,500 sq ft taken by Total E&P up” some of the new build and refurbished at £32.00 per sq ft, albeit occupier UK at West Campus, Westhill. Although stock. The bulk of the Grade ‘C’ space incentives remain particularly attractive. agreement was reached in March 2017, (over 558,000 sq. ft) is no longer “fit for Rental values are expected to come under the energy firm only moved into purpose” and should be considered for pressure in 2018 driven by a continued the property in Q4 2017 following re-development or alternative use. supply and demand imbalance. refurbishment of the building. The second largest letting saw Somebody Cares relocate to another large secondary office in Aberdeen. The charity agreed terms on a new lease of 51,000 sq ft at John Wood House. In May, Chrysaor Holdings Limited, took over 47,700 sq ft at The Capitol on Union Street for their North Sea Operations HQ. Since opening in 2016, 85% of available space has now been let in the £30m award winning redevelopment of the former cinema. Other tenants in the building include Price Waterhouse Coopers (PWC) and Dentons UKMEA LLP. Many occupiers took advantage of “the tenant friendly” market conditions throughout 2017 to re-negotiate the terms of their existing lease with their landlords (nervous about potential long void periods The Capitol and large empty rates bills) on more favourable terms in return for extending or renewing their lease duration after first TABLE 1 Key office transactions in 2017 circulating requirements in order to “test the market”. This lead to a number of Address Tenant Size Rent requirements being later withdrawn from (Sq ft) (£ per sq ft) the market. Office & Leisure Building, West Campus, Total 138,535 £21.00 The number of active requirements at Arnhall Business Park, Westhill the end of 2017 stood at 50, although John Wood House Somebody Cares 51,153 Nominal rent the vast majority (39) of these were for sub 5,000 sq ft. However, we have seen The Capitol, Union Street Chrysaor Holdings Ltd 47,657 £32.00 a small number of larger requirements 395 King street TuaRx Therapeutics Ltd 12,386 All-inclusive rent of 10,000 sq ft and above return to H1, Hill of Siccar Point Energy Ltd 7,730 £23.00 the market following recent positive announcements from operators in the Oil Source: Knight Frank Research

3 ABERDEEN OFFICE MARKET REPORT SPRING 2018 RESEARCH

INVESTMENT MARKET Following a subdued market in 2016, the gap between buyer and seller expectations finally began to close in 2017. Office investment volumes for the year were £98.8m, the highest total achieved since 2014.

In the run up to the ‘snap’ general pre-let agreed prior to the oil price expected to remain stable in the coming election in June the market contended crash in 2014. This was the 105,594 12 months with what has unfortunately become sq ft office let on a 15 year lease to Secondary pricing on the other hand normal political uncertainty. However Lloyds Register by developer Drum is highly variable. As buyer and sellers with the possibility of a second Scottish Property Group at Prime Four Business Independence Referendum having Park. This sale, together with the expectations began to converge, we abated there have been notable signs of subsequent sale in January 2018 of the did see a limited number of transactions increased confidence in the market and Statoil office (also 15-year lease) at Prime with short to medium term income take investor sentiment towards Four has shown the continued success place. The purchases by FCFM Group as a whole. The most tangible signs of the Park to attract investors and the of Quattro House and Trafalgar have generally been in the Central Belt, demand for well-let high quality stock. House, both in Altens, showed the however during M&G’s sale of the The last six months have also seen two true differential in pricing for some West Campus at Westhill, we saw the of the largest property investments for assets, which had short/medium term price quoted for the asset increase as Aberdeen come back to the market – the income and tenants not in situ. Over the a direct result of the election result as Aker HQ, for £114.9m (6.75%) and longer term, the removal of a number UK Funds increased their valuations of City Park (Sir Ian Wood House), Altens for of secondary office buildings from the Scottish assets. The investment was £81.20m (6.75%). market can help occupancy rates and originally marketed for £38.75m (8.01%) Prime office yields remained at 6.50% in market recovery. The sale of Denburn in March and sold in November for 2017, meaning prime assets in Aberdeen House on Union Terrace within the £39.38m (7.88%) with an unexpired term still offer a considerable discount when City Centre for conversion to a hotel / of 11 years. compared to other regional centres. aparthotel is one of the early examples The Aberdeen market did witness an Notably, at this level, yields are 100 of such with an expectation that as increase of 419% when compared to the basis points above the market peak of sellers reduce their price expectations cycle low of 2016, albeit it was propped 5.50% recorded in 2007. Despite some further redevelopment of offices will up by one sale, which was driven from a improvement in sentiment, pricing is become viable.

TABLE 2 FIGURE 3 Key office investment transactions in 2017 Aberdeen offices investment volumes

600 Address Size Price Net initial Purchaser 50 (Sq ft) (£m) yield (%) 500 40 Lloyds Register, Prime 105,594 £41.28m 6.68% LCN Purchasers Four, 400

30

West Campus, Westhill 211,773 £39.38m 7.88% Gulf Islamic 300 % (113,951 office) Investments (GUI) £m 20 200 Quattro House, Altens 44,996 £7.70m 12.22% FCFM Group

100 10 Ensco House, Gateway 25,802 £6.5m 7.34% Private Investor Business Park 0 0

Trafalgar House 1&2, Altens 95,661 £4.00m 30.48% FCFM Group 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 £M % OF SCOTLAND TOTAL

Source: Knight Frank Research Source: Knight Frank Research/Property Data

4 ABERDEEN OFFICE MARKET REPORT SPRING 2018 RESEARCH

West Campus, Westhill was the subject of the largest letting and second largest sale of 2017

KNIGHT FRANK VIEW Occupier market “buying” opportunity. Trend for the addition to signs of an improving • Sentiment in the industry is year is likely to be a continued interest occupier market, is slowly beginning cautiously optimistic, however by occupiers in new space in the to fuel renewed investor interest. City Centre. despite the oil price reaching a high • Despite an upturn in sentiment by of $67.00 per barrel at the close of • The bulk of the Grade ‘C’ space is no UK Funds to Scotland, we expect December 2017, there will inevitably longer “fit for purpose” and should overseas investors to continue to be a significant time lag before we be considered for re-development or witness a tangible improvement in dominate the market. alternative use. the occupational market. • As the market begins to recover, • Early indications for 2018 are we would expect to see greater Investment market encouraging with many occupiers numbers of investments traded seeing the current imbalance of • The offer of favourable pricing when compared to the past couple supply over demand being a great compared to regional competitors, in of years.

5 RESEARCH Lee Elliott Partner Head of Commercial Research +44 20 7861 5008 [email protected]

Darren Mansfield Associate +44 20 7861 1246 [email protected]

ABERDEEN Eric Shearer Partner Development & Investment +44 1224 415 948 [email protected]

Matthew Park, Senior Surveyor Disposals & Acquisition +44 1224 415 951 [email protected]

Chris Ion Partner Investment, Disposals & Acquisitions +44 1224 415 969 [email protected]

Richard Evans Partner Valuations & Lease Advisory +44 1224 415 952 [email protected]

Grant Hendry Associate Building Consultancy +44 1224 415 963 [email protected]

Malcolm Campbell Associate Planning +44 1224 415 949 [email protected]

Fiona Alsop Associate Management +44 1224 415 944 [email protected]

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

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