RESEARCH

ABERDEEN OFFICE MARKET ACTIVITY REPORT SPRING 2015

HIGHLIGHTS IN 2014

Aberdeen recorded the Norwegian oil services Investment A new prime headline highest annual take-up firm AKER Solutions ASA transaction volumes rent was achieved at ever, surpassing signed Scotland’s largest reached a record £32.00 per sq ft 1 million sq ft ever leasing deal breaking £641m ECONOMIC OVERVIEW Aberdeen is the centre of the UK’s offshore energy industry, and supply and demand for energy shape its economic outlook.

OPEC’s decision to allow oil prices to It should also be noted that the general fall last year was prompted by concerns UK economy is strengthening, with low over a global oversupply. The latest inflation now lifting real incomes for Baker Hughes survey reported that the consumers. Employment levels are at number of oil rigs operating worldwide has their highest since 1971, and the Bank of dropped by 10% in the three months to England is forecasting 2.9% GDP growth January 2015. This has encouraged some in 2015, compared with 2.6% last year. commentators to predict that prices are SEP 2014 now past the low point; such as Standard $95.89 FIGURE 1 Chartered Bank forecasting Brent Crude to Oil price falls Scotland rejects Aberdeen office take-up and oil prices below $100 a independence reach $76 a barrel by the end of the year. barrel for the first time in 16 months Aberdeen will have to weather oil industry 1,200 180 consolidation this year. Job losses 160 OCT 2014 and contractor rates cuts have been 1,000 $86.13 announced, and industry figures 140 are predicting more cuts ahead. Pressure 800 120

Markets in turmoil International el as Europe stocks Energy Agency is growing on the Treasury to reduce taxes 100 600 drop again. Oil falls shaves 200,000 to support North Sea oil, and it could prove to $80 a barrel barrels per day 80 000s sq ft

fortunate that 2015 is an election year. $ per barr off its demand 400 forecast for 60 the year While not understating the difficulties 40 ahead for Aberdeen, cheap oil should 200 20 boost global economic growth this year 0 NOV 2014 0 $76.96 and in the long-run create more demand

for energy. Aberdeen is a centre of oil 200 4 200 5 200 6 200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 Brent oil crashes Ineos to invest industry expertise that firms will want to EXISTING SPACE PRE-LET PRIOR TO below $80 to up to £640m in CONSTRUCTION four-year low UK shale gas utilise on future projects, both in the North BRENT CRUDE OIL PRICE (annual average) Sea and elsewhere in the world. This should help to protect specialist jobs. Source: Knight Frank Research / Thomson Reuters DEC 2014 $60.55

BP shows strain Brent crude FIGURE 2 of Opec price plunges below 2014 take-up vs 10 year average war with $1bn of $57 per barrel restructuring cuts and Wood Group 100% cuts contractor pay 80% 60%

JAN 2015 60% $47.45 40% 40% Oil companies BP & BG axe Sinopec Talisman spending on 20% and Tullow Oil oil exploration 20% cut jobs and jobs 0% 0% FEB 2015 $61.44 -20% -20% Halliburton to Oil & Gas UK -40%

cut 6,400 jobs pleads with h di ff field George Osborne M2 5 worldwide deen -40% Leed s Bristol for tax cut on Car h Shef Glasgow Aber Edinbu rg

offshore drilling di ff Newcastle field M2 5 Manchester Birmingham deen Leed s Bristo l Car est En d Central London Shef Glasgow W Aber

Source: Knight Frank Research Source: Knight Frank Research Edinbu rg Newcastle Manchester Birmingham London City

2 Aberdeen Bristol Manchester Central London Edinburgh Cardiff Glasgow Birmingham Leeds Sheffield M25 Newcastle -40% -20% 0% 20%40% 60%80% 100% OCCUPIER MARKET Aberdeen remained one of the UK’s best performing office markets in 2014, with take-up surpassing 1 million sq ft, the highest level ever.

The continued shortage of existing to 73,000 sq ft and Titan Investors/BA supply resulted in the bulk of Pension Fund’s Silver Fin totalling over transactions being by way of pre-lets. 132,000 sq ft. Significant pre-let transactions included; The controversial Marischal Square DOF Subsea taking over 40,000 sq ft Development by Muse on the former at Horizons House, PD & MS Energy taking Miller Cromdale’s 46,920 sq City Council St. Nicholas House site will ft at Ardent West in the North Dee add an additional 170,000 sq ft of offices Business Quarter (NDBQ), and Statoil bringing the potential new build stock in committing to a 45,000 sq ft new build the City Core alone to 455,000 sq ft. at Drum Property Group’s Prime Four The numerous relocations witnessed Development at Kingswells. during 2014 is having a dramatic effect on The market was dominated by two the supply of second hand stock. major pre-lets in 2014 namely Wood The total available office stock, both new Group PSN committing to 215,000 and second hand, at the time of print in AB1, recently refurbished, offering suites from sq ft at City Park in Altens from Argon 5,000 sq ft to 48,500 sq ft in the city centre Q1 2015 is a staggering 1.3 m sq ft. and a letting to Norwegian oil services firm Aker Solutions ASA for a new HQ facility at Abstract’s Aberdeen TABLE 1 Key office transactions in 2014 International Business Park totalling 334,795 sq ft. The latter was Scotland’s Address Tenant Size Rent Date largest ever leasing deal. (Sq ft) (£ per sq ft) Aberdeen International Aker Solutions Transactions involving existing stock 335,000 £23.75 Nov-14 Business Park, Dyce ASA represented only 26% of total take-up Site 38, City Park, in 2014. There were two significant Wood Group 215,000 c.£24.00* Sep-14 Hareness Road, Altens deals including Wood Group taking Nexen House, Hareness Road, Wood Group 59,723 £19.33 Mar-14 59,723 sq ft at Nexen House, and Altens Industrial Estate, Altens PSN (Assignee) AMEC acquiring 32,750 sq ft at City Ardent West, PD & MS View Business Park. Energy 46,920 £29.00 Oct-14 North Esplanade West Aberdeen Ltd Despite a large number of transactions Phase 2, Prime Four Business Statoil 45,000 Undisclosed Sep-14 both in the City Core and out of town, Park, Kingswells there was less activity in the West End. 2nd, 3rd & 4th floors, Horizon DOF Subsea 40,919 £28.00 Nov-14 The letting of 20 Queen’s Road to Iona House, Waterloo Quay UK Ltd Energy however, recorded a new prime Peregrine Road, Westhill Undisclosed 31,890 £21.50 Oct-14 headline rent of £32.00 per sq ft. Source: Knight Frank Research At the end of 2014, existing Grade A *Unconfirmed office availability totalled 78,617 sq ft with newly refurbished AB1 on Huntly Street and the recently completed KNIGHT FRANK VIEW Pilgrim House in the NDBQ accounting • The volatility in the oil price is expected • In the last three “oil price crashes” for 83% of this total. to impact the office market for the recovery has taken between remainder of 2015 and into 2016. 18-24 months. As predicted previously, the acute shortage of Grade A supply witnessed • The already unprecedented supply is • What we will encounter in this current cycle is a “perfect storm” of low since 2012 has resulted in a number likely to increase further throughout the demand and high supply. This will of schemes, predominately in the City year reaching record levels by the end lead to significantly increased tenant Core, coming forward speculatively. of 2015. incentives, possibly with shorter lease These schemes include Dandara’s The • Occupier demand is expected to be terms and inevitably rent reductions in Point development of 80,000 sq ft, KPG/ subdued until the oil price recovers. older stock. M&G’s Capitol development extending

3 ABERDEEN OFFICE MARKET REPORT SPRING 2015 RESEARCH

INVESTMENT MARKET Investment turnover in Aberdeen reached a record high of £641m in 2014, despite the notable impact caused by the historic Scottish Referendum in September.

The year was categorised by three distinct would still have been in excess of the previous periods of activity; in the first four months record year in 2013. “For the first time of the year we saw a flurry of activity as Prime yields for Aberdeen offices have ever, Aberdeen investors went after quick sales and closing hardened from 6.00% at the end of 2013 dates became common place for almost recorded to 5.75% throughout 2014. Despite this, all but the poorest or over-priced assets. As expected, the middle of the year was Aberdeen still trades at a discount compared Scotland’s largest much quieter as investors waited for the to other regional cities. office investment outcome of the Scottish Referendum in With further pre-let’s, Aberdeen again September. Following the ‘No’ vote, the final provided a key foothold for investors transaction of quarter of the year was predicted to bring looking to source long-income stock let to the year.” a return to activity witnessed earlier in the strong covenants. For the first time ever, year. However, this did not materialise as Aberdeen recorded Scotland’s largest office the impact of future Scottish Devolutionary investment transaction of the year with powers and a general upturn in other UK Abstract Cornwall’s sale of the Aker HQ at regional markets meant that the return of Aberdeen International Business Park for the investment market in Aberdeen, and £127m, reflecting a yield of 5.75%, to Legal Scotland as a whole, was ‘lukewarm’ rather & General. This Grade A building contained than spectacular. all the necessary attributes sought by Investment in Aberdeen’s office market Institutional investors; long lease, excellent reached £641m in 2014, a near 150% covenant, guaranteed rental growth, top grade increase on an annual basis. In total, 14 specification and a good commercial location. investment deals, above £10m, were The focus on big ticket sales stole the limelight recorded in 2014 which included Legal & General Property’s acquisition of Aberdeen in 2014 as buying opportunities for private International Business Park, Aviva Investors’ investors and small property companies purchase of Marischal Square for £107m and remained scarce with no new product Kennedy Wilson Group securing Seafield completed. However, during the year we House for £124m. saw a handful of West End investment sales transacted which re-affirmed the sub-sector’s As witnessed in the two preceding years, the popularity with local affluent investors. number of Institutions and Funds investing in Aberdeen increased. Although Aberdeen’s Despite a year dominated by record highs, record investment turnover of £641m was there are fears that investment activity will FIGURE 3 in a large part due to the three mentioned be affected following the significant fall in oil Aberdeen offices investment volumes investment sales, all in excess of £100m, prices which occurred in the final months total turnover without these three ‘outliers’ of 2014. 800 70 700 60 600 50 500 40

400 % £m 30 300

200 20

100 10 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

£M % OF SCOTLAND TOTAL

Aker Solutions new HQ – the largest deal in Scotland Source: Knight Frank Research/Property Data

4 ABERDEEN OFFICE MARKET REPORT SPRING 2015 RESEARCH

“The impact of the oil price drop has already had a profound effect on property decision making.”

Miller Cromdale’s Ardent West development at NDBQ is currently under construction

TABLE 2 Key office investment transactions in 2014

Address Size Price Net initial Purchaser (Sq ft) (£m) yield (%) Aker HQ, Aberdeen International 335,000 £127.00 5.75 Legal & General Business Park, Dyce BP HQ, Dyce 192,837 £68.05 6.62 LaSalle IM Maersk House, Altens 99,648 £28.50 6.20 Private investor Johnstone House, Rose Street 52,378 £19.39 6.75 Private Family Trust Caledonian House, Union Street 48,535 £15.10 6.63 Tesco Pension Fund Ardent West, North Esplanade West 47,650 £16.95 7.40 LaSalle IM Admiral Court, Poynernook Road 40,488 £11.75 8.90 Aston Property Ventures Pilgrim House, Old Ford Road 27,716 £10.00 6.54 CBREGi Aberdeen Energy & Innovation Mixed *1 £35.45 8.42 Moorfield Parks, Bridge of Don

Source: Knight Frank Research *1 - Mixed portfolio of office, industrial and ground leases. 65% of the rental income attributable to offices

KNIGHT FRANK VIEW

• The impact of the oil price drop has main regional cities has led investors already had a profound effect on to have a greater number of buying property decision making. Many opportunities elsewhere and investors are adopting a “wait and therefore the pool of potential buyers see” approach to how the local market for the majority of assets is expected performs before deciding to purchase, to reduce. or indeed sell, commercial property • We expect a softening of yields in Aberdeen. going forward for non-prime stock as • The oil price is not the only pressure investors appraise opportunities in light on the local investment market – the of ‘new’ market conditions not seen accelerating recovery in the other before in Aberdeen’s property market. Recently completed Pilgrim House in the NDBQ

5 COMMERCIAL BRIEFING For the latest news, views and analysis of the commercial property market, visit knightfrankblog.com/commercial-briefing/

RESEARCH James Roberts Chief Economist +44 20 7629 1239 [email protected]

Simret Samra Senior Analyst +44 20 7861 5008 [email protected]

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

Katherine Monro Partner Disposals & Acquisitions +44 1224 415 962 [email protected]

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

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

Douglas Garden Partner Building Consultancy +44 1224 415 940 [email protected]

Richard Evans Partner Valuations & Rent Reviews +44 1224 415 952 [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. © Knight Frank LLP 2015 This report is published for general information only and not to RECENT MARKET-LEADING RESEARCH PUBLICATIONS be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or

RESEARCH RESEARCH RESEARCH liability whatsoever can be accepted by Knight Frank LLP for UK RETAIL any loss or damage resultant from any use of, reliance on PROPERTY MARKET OUTLOOK 2015 or reference to the contents of this document. As a general EUROPEAN CENTRAL COMMERCIAL PROPERTY OUTLOOK report, this material does not necessarily represent the view LONDON 2015 QUARTERLY – OFFICES Q4 2014 of Knight Frank LLP in relation to particular properties or

Forecast growth per annum 2014-2018 OVERVIEW projects. Reproduction of this report in whole or in part is not 20.0% RENTAL GROWTH 2015 will be a better year for retail as the economic recovery 9.9% CAPITAL GROWTH TOTAL RETURN 15.0% 10.5% continues, although the first half of the year is likely to be dominated 9.2% 8.3% by the general election. However, retail sales will receive a boost from 8.7% 8.7% 10.0% a buoyant labour market, lower inflation and cheaper fuel on the back 4.7% of falling oil prices. Positive house price growth will also continue to allowed without prior written approval of Knight Frank LLP to 5.0% 4.3% 3.6% 3.4% support strong consumer confidence. 4.3% 3.1% 3.0% 2.7% 2.5% 1.8% 2.3% 0.0% 1.7% However, the retail market continues to be driven by structural fice change due to the growth of online shopping and profit margins for Of operty Retail Industrial ShoppingCentre All Pr High Street bricks-and-mortar retailers will continue to be squeezed by non-store Warehouse the form and content within which it appears. Knight Frank Source: IPF Consensus Forecasts Nov 2014 sales and an increasingly internet savvy population. GLOBAL SHOPPING CENTRES LLP is a limited liability partnership registered in England with 1. Continued investor appetite for all sub-sectors of UK shopping centres. Further yield compression is expected during 2015, particularly for secondary stock. CAPITAL 2. Overseas money will continue to focus upon the UK’s shopping centres, rather than Continental European schemes. registered number OC305934. Our registered office is 55 3. In-town rental growth is expected to re-emerge, although it will be MARKETS location and town specific. 4. Larger, more dominant locations and schemes will continue to Q1 2015 outperform the wider market. 5. Transactions involving larger schemes are expected to decline in Baker Street, London, W1U 8AN, where you may look at a list 2015. More consolidation and trading of less prime stock for portfolio re-balancing and profit taking is also expected.

TAKE-UP – 25% ABOVE CENTRAL LONDON HIGHEST QUARTERLY INVESTMENT PROPERTY WEATHER MAP FOR 2015 LONG-TERM AVERAGE VACANCY – 5.6% TURNOVER ON RECORD JAPANESE PENSION FUNDS OPPORTUNITIES & RISKS OUTLOOK of members’ names. Central London Global Capital European Commercial UK Retail Property Quarterly Q4 2014 Markets Q1 2015 Outlook 2015 Market Outlook 2015

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