Source: Savills Research
Despite a year of uncertainty, the Scottish office market remains buoyant
Occupational
The Scottish office markets finished 2016 strongly, with wider take-up reaching 694,849 sq ft for the final quarter, 9% above the quarterly average of 640,352 sq ft.
On an annual basis, the Scottish markets saw a total of 2,370,497 sq ft taken during 2016, 2% below the level recorded during 2015, but 10% above the long term average (see Graph 1). Given the political uncertainty faced throughout the year, the Scottish market has held firm.
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GRAPH 1Leasing take-up by city
Public services, education and health was the most active business sector during 2016 (see Graph 2). However, the TMT sector had another strong year, and was the most active business sector for deals below 10,000 sq ft.
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GRAPH 22016 take-up by business sector
Source: Savills Research
This was largely down to the University of the West of Scotland who took a 225,000 sq ft pre-let at the EcoCampus, Hamilton during the final quarter, whilst Napier University took 107,514 sq ft at South Gyle Business Park, Edinburgh during the first quarter. This boosted 2016's out of town take-up above the level recorded during 2015.
Despite falling slightly in both Edinburgh and Glasgow between end 2015 and end 2016, total availability in Scotland increased by 19% (see Graph 3). This was down to Aberdeen's availability increasing 51% to 2.65 million sq ft over the course of 2016.
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GRAPH 3Availability by city
Source: Savills Research
35,000 sq ft of available space at Kintore House, Edinburgh, was purchased by Gloag Investments to convert to hotels during the final quarter, which has left the city centre with less than two years of supply remaining.
There remains a shortage of Grade A space in both Glasgow and Edinburgh, which has ultimately brought rent free periods back in to nine months and 12 months on a five-year lease respectively.
At end 2016, top rents remain at £33.50 per sq ft in Edinburgh, £30 per sq ft in Glasgow and £32 per sq ft in Aberdeen.
Investment
Despite political uncertainty regarding the UK's relationship with the EU, office investment in Aberdeen, Edinburgh and Glasgow reached £565m during 2016, which marks a 9.5% fall on the 10-year average (see Graph 4).
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GRAPH 4Office investment by city
Source: Savills Research, Property Data
Prime yields held steady during the final quarter of 2016, with Glasgow and Edinburgh both standing at 5.5%, with Aberdeen at 7.25%.
Savills latest research illustrates lower volatility in returns for the Scottish office market, compared to the rest of the UK (see Graph 5). With returns set to be income driven going forward and yields remaining attractive relative to the rest of the UK, we see this as an opportunity for the Scottish markets to outperform during 2017.
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GRAPH 5Office returns volatility by region
Source: Savills Research, MSCI
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TABLE 1Significant Deals in Q4 2016
Source: Savills Research