As we know, the commercial investment market remains cyclical and following a number of recent macro-economic shocks, the office sector, in particular, has seen transaction volumes fall due to weaker market sentiment.

In Scotland, office investment fell by 42% last year when compared with 2022 as both buyers and sellers took a ‘wait and see’ approach. Consequently, price discovery has remained challenging, with Savills prime office yields for Edinburgh and Glasgow reaching 7% and 7.5% respectively at the end of Q1 this year. Generally speaking, the outward yield shift for regional offices has been notable, softening by 200 basis points (bps) since the peak of the market in August 2022.

Things are looking up

However, investor sentiment is improving, with growing optimism on the economic outlook combined with an expectation that we will see a fall in both interest and swap rates later this year. All being well, this should mean an uptick in activity in the second half of 2024.

Up until this point there has been hesitation from buyers as pricing continues to find its level, but as key buildings across Scotland change hands in the coming months, this should act as a bellwether for future transactions.

Confidence breeds confidence

In Scotland we are seeing office buildings that had previously seen almost no investor interest at all exceed expectations when it comes to price. Although not at the levels seen at the height of the market at the end of 2022, it is still more positive than even a month ago.

With this in mind, the window of opportunity to buy is now, as pricing will only get keener as we start to see the cost of borrowing money trend downwards. This should help convince vendors that they can sell at this new found level and, ultimately, the definition of market value is a willing buyer and a willing seller.

Will we see a quick recovery?

Historically, prime pricing has always recovered quickly after reaching the bottom. From July to December 2009, during the GFC, prime regional yields hardened by 125bps demonstrating the pace of recovery.

It is also important to note that the occupational markets in both Edinburgh and Glasgow remain relatively robust, with the former seeing take-up of 649,000 sq ft in 2023, only marginally down on the previous year. While Glasgow didn’t fare quite as well, with take-up of 310,000 sq ft, it still saw a number of significant transactions. Most importantly, perhaps, at present prime yields do not reflect the rental growth prospects that both markets currently offer, so this too bodes well when it comes to future pricing.

In short, much like the retail sector over the past few years, the office market is undergoing a period of evolution. It will ultimately find its level, but for now there are plenty of opportunities for investors to purchase an asset with uplift potential and for a vendor to not feel short changed in the process. 

Further information

Contact Nick Penny

Market in Minutes: UK Commercial