Savills World Research UK Offices

Spotlight Scottish Office Market Spring 2018

Cadworks, above, will provide with 94,000 sq ft of Grade A space on its completion in 2020. Savills are acting on behalf of the landlord.

■ Take up in the first quarter of 2018 ■ Traditional offices must continue to reached 493,000 sq ft in 's reinvent themselves in order to remain “We forecast the sub 5,000 sq core office markets ( wider, attractive and compete with serviced city centre, Glasgow offices for the sub 5,000 sq ft deals ft market to strengthen through city centre), 9% above the five year quarterly average of 452,000 sq ft. ■ Prime office yields remain at 6.25% 2018, boosting total office take and 5.5% for Aberdeen and Glasgow up to 1.8 million sq ft during ■ Over the next five years, Aberdeen, respectively, whilst Edinburgh's prime Edinburgh and Glasgow are forecast yields have moved in a further 25 bps 2018,” Mike Barnes, Savills to see a combined 3.6% office based to 5% amid strong investor demand employment growth, in line with the for the capital. Research national average.

savills.co.uk/research 01 UK Commercial | Scottish Office Spotlight

The Scottish office market has serviced office space. Indeed, a continued its steady occupational number of Edinburgh and Glasgow's performance into 2018, as tight landlords are sub-dividing their space supply continues to add upward into smaller suites to cater for the pressure to rents. strong appetite in the high quality 2-3,000 sq ft market. Glasgow end 2018 Occupational top rent forecast: Take up in the first quarter of 2018 However, traditional offices must reached 493,000 sq ft in Scotland's continue to reinvent themselves £32.50 per sq ft core office markets (Aberdeen wider, in order to remain attractive and use. The largest city centre deal Edinburgh city centre, Glasgow compete with serviced offices for was engineering consultant, Sweco city centre), 9% above the five year the sub 5,000 sq ft deals. Landlords signing for 14,000 sq ft at Quay 2, quarterly average of 452,000 sq ft. must also adapt to tenants who are in however, Instant Offices signed for search of shorter lease terms. 24,000 sq ft at Cornerstone, South We forecast 2018 core Scotland take Gyle, marking the largest serviced up to reach 1.8 million sq ft (Graph Aberdeen's office market continues office deal in Scotland's out of town 1), in line with both the previous five to strengthen, with enquiries at market on record. year average and 2017's level. This their highest levels since before the is despite bumper public sector oil price shock in 2014. With take With only 140,000 sq ft of Grade A requirements which were satisfied last up exceeding 400,000 sq ft during space remaining in the city centre, year in both Glasgow and Edinburgh. 2017 (driven by Total's and Chrysaor competition for large floorplate stock Energy's 108,000 sq ft and 48,000 sq is becoming even more competitive Throughout 2018, we expect to see ft deals respectively), Savills forecast and tenants in search of larger a return in demand towards the Aberdeen's take up this year will floorplates are being forced to the sub 5,000 sq ft market, after a fairly reach c.450,000 sq ft, driven by a fringes. This is only enough space for modest 2017. Last year, take up in steadier churn of deals. around six months of Grade A take up this market reached 393,000 sq ft, at average annual levels. 11% down on the five year average. Q1 2018, for example, saw 89,000 sq ft of space taken across 22 deals, 2 Semple Street reaches practical Part of this fall was down to the the most deals in a quarter since Q3 completion at end Q2 2018, whilst emergence of the serviced office 2014. The key deal was Aberdeen The Mint (60,000 sq ft) and Capital sector across Scotland. Spaces Journals taking 19,000 sq ft at One Square (122,000 sq ft) are scheduled signed for 30,000 sq ft at One Lochrin Marischal Square as they relocate for completion in Q1 2019 and Q2 Square, Edinburgh during Q4 2017, from the Lang Stracht in Mastrick. 2020 respectively, which should ease while Orega signed for 22,000 sq ft the shortfall. at 9 George Square, Glasgow during With no further developments planned Q1 2018. in Aberdeen, availability has peaked Glasgow's city centre lettings (Graph 2), and as tenant demand soared to 249,483 sq ft during the Around 13,000 startups were founded picks up throughout the year, we first quarter of 2018, driven by the across Aberdeen, Edinburgh and expect incentives to reduce. Government Property Unit's 187,000 Glasgow during 2017, according to sq ft pre-let at Atlantic Square. Startup Britain. We will expect to see Take up in Edinburgh city centre new office requirements emerge from reached 155,000 sq ft during the first However, besides this deal and these high growth companies over the quarter of 2018, although 44,000 sq ft Orega's serviced office deal, there next 12-18 months, as they progress of this was FRP Advisors' acquisition were no deals over 7,000 sq ft during from incubator space to traditional/ of Buchan House for alternative the first quarter.

GRAPH 1 GRAPH 2 We forecast 2018 take up to reach 1.8 million Availability will remain scarce in Edinburgh sq ft for the core Scottish office markets and Glasgow through 2018

2,500,000 3,000,000

Aberdeen 2,000,000 2,500,000 Glasgow ) ft

sq 2,000,000 1,500,000

1,500,000 1,000,000 Availability ft) (sq Availability 1,000,000 Edinburgh 500,000 Core Scotland Take Up ( Take ScotlandCore 500,000

0 2013 2014 2015 2016 2017 2018 (F) - Aberdeen (Wider) Edinburgh (CC) Glasgow (CC) Annual Average 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018 Source: Savills Source: Savills

02 Spring 2018

GRAPH 3 Office investment has started 2018 strongly BRENT CRUDE £1,400 Q1 Q2 Q3 Q4 Q1 Average RECOVERY AND £1,200 INFRASTRUCTURE £1,000 IMPROVEMENTS £800 BOOSTS ABERDEEN £600 Mike Barnes, Research Analyst Office Investment (£m) Office £400 highlights his key themes

£200 With the price of Brent Crude oil now hovering around $70 per barrel, we expect oil extraction operators to £0 resume drilling into the North Sea later this year. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Property Data 2017 marked a number of corporate deals in As announced at MIPIM 2018, representing a 6.9% yield. Aberdeen, a key indication of latent office demand. FORE Partnership will be bringing Private equity backed, Chrysaor, received £1.6bn forward Glasgow's first speculative Investor demand for Glasgow's prime of funding during 2017 and later last year signed for office development in the city centre lots remains strong, with Savills acting 48,000 sq ft in the Capitol, expanding from around since 2015 and we expect a further for L&G LPI Income Property Fund's six employees on inception to approximately 450. 97,000 sq ft of speculative office acquisition of 3 Atlantic Quay at the The company has been able to benefit from lower space at BAM's Atlantic Square turn of the year. Hermes also acquired operating costs by acquiring capital from major oil and to be announced later this year. Skypark, Glasgow for an undisclosed gas companies at a discount. A shortage of Grade A space will sum. continue to boost top rents which we Whilst many of the multinational oil producers have expect could reach £32.50 by end Edinburgh however, saw a fairly turned their attention to deploying capital in more 2018. Cadworks (pictured cover), will modest first quarter of office cost-effective global locations including Saudi Arabia provide 94,000 sq ft of space and investment, with only £38 million of and Kuwait, this has created an opportunity for smaller will be Scotland's first office allowing transactions, due in part to a lack of engineering companies to acquire North Sea capital. cyclists to ride directly into their office openly marketed stock. The key deal Siccar Point could be among the next fast growth oil upon its completion in 2020. was Patrizia Immobilien's acquisition and gas companies expanding in the city. of Apex House for £28 million as Over the next five years, Aberdeen, German investors continue to favour It’s not only oil extractors who are considering Edinburgh and Glasgow are forecast Edinburgh offices, and have acquired expansion in Aberdeen. Exploration firms are now to see a combined 3.6% office based £324 million of the capital's offices weighing up taking on further risk. This will indeed employment growth, in line with the since 2016, 37% of the total. create new demand for office space in Aberdeen which national average. This indicates a net Savills expect to reach 450,000 sq ft this year, 20% additional 13,000 office based jobs, or Why we expect yields to above the level recorded last year. a need for a net additional 1.3 million harden in Scotland sq ft of office space across the three One of the key determinants of We also expect the number of occupational deals to cities. yields in the office market is the increase during 2018. Whereas 2017’s improved level political environment. Graph 4 shows of take up was in part driven by Total’s 108,000 sq ft Investment that the proportion of people who deal at Westhill, 2018 will see a stronger sub 5,000 Scottish office investment would vote in favour of Scottish sq ft market, largely driven by the oil and gas sector, transactions continued the strong Independence has fallen from 47% providing the Aberdeen market with a much needed momentum from last year, with £342 immediately post EU referendum to confidence boost. million of transactions recorded in the only 37% in January 2018, according first quarter of 2018, 96% above the to whatscotlandthinks.org. This Beyond the oil market, Aberdeen is set to benefit from historic first quarter average (Graph 3). marks the lowest level since the EU the £745 million Aberdeen’s Western Peripheral Route referendum. (AWPR), currently Scotland’s largest infrastructure Aberdeen has seen higher levels project. AWPR is set to complete in Summer 2018 and of office investment during the first Decreasing political risk has provided will provide improved access from the South to the city quarter of 2018 (£131 million) than the UK Institutions in particular, with a centre. in the previous two years. This also boost in sentiment, which has applied marks the strongest year of overseas downward pressure on prime office Office market fundamentals continue to improve in investment into Aberdeen on record. yields. Post EU referendum, Scottish Aberdeen and as long as the oil price remains stable, The headline deal was LCN Capital office initial yields jumped from 5.8% the Aberdeen market will continue to benefit from the Partners' £112.5 million acquisition of to 6.1% in July 2016 as the spectre uptick in enquiries throughout the year. Aberdeen International Business Park, of a second Scottish referendum

savills.co.uk/research 03 UK Commercial | Scottish Office Spotlight

% 3.6 m sq ft sq ft Office Based 1.8 94,000 Core office take up speculative office 5.00% Employment Growth across Scottish cities space under Edinburgh across Scottish cities forecast for 2018 construction in prime office yield over the next five years Glasgow

GRAPH 4 appeared more likely. Average yields continued to rise and peaked at How would you vote in a Scottish independence 6.7% in April 2017, and have since referendum if held now? hardened only marginally to 6.6% as % Would Vote for Scottish Indepedence UK Regional Office Initial Yield (%) at March 2018. Scottish Office Initial Yield (%) 7.0% 54%

6.8% As a comparison, UK Regional 52% average office yields peaked at 6.6% 6% during October 2016 and have 6.4% 50% continued their downward trend to 6.2% 5.3% in March 2018 (Graph 4). 48% Yield (%) Yield 6.0% The yield spread between Scotland 46% 5.8% and Rest of UK average yields now stands at 130 bps, the largest spread 5.6% 44% on record. Savills believe that given a 5.4% recovery in the price of Brent Crude 42% 5.2% oil and tightening occupational % voteWould forScottish Independence markets, Scottish offices have 5.0% 40% become relatively cheap and there Jul-16 Jul-17 Oct-16 Oct-17 Apr-17 Jun-16 Jan-17 Jun-17 Jan-18 Mar-17 Mar-18 Feb-17 Feb-18 Nov-16 Dec-16 Nov-17 Dec-17 Aug-16 Sep-16 Aug-17 Sep-17 is further room for yields to harden May-16 May-17 during 2018. n Source: MSCI, whatscotlandthinks.org Savills Scottish offices team Please contact us for further information

Nick Penny Simpson Buglass David Cobban Stuart Orr Jeremy Tolley Head of Scotland Aberdeen Agency Glasgow Agency Glasgow Investment Edinburgh Agency 0131 247 3803 01224 971 133 0141 222 4101 0141 222 4144 0131 247 3745 [email protected] [email protected] [email protected] [email protected] [email protected]

Kate Graham Dan Smith Mat Oakley Mark Fleming Craig Timney Edinburgh Agency Aberdeen Agency Research Edinburgh Investment Valuation 0131 247 3821 01224 971 134 0207 409 8781 0141 222 5859 0131 247 3820 [email protected] [email protected] [email protected] [email protected] [email protected]

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