Leading property advisor Ryden has published its bi-annual review of the Scottish property market.
Economic growth in Scotland was marginal in Q2 2015. Underlying economic activity is finely balanced and unemployment has increased. The slowdown was unexpected as surveys had suggested that economic expansion had been sustained. The country’s property markets clearly believe that this is a temporary dip. The markets continue their cyclical upturn. Activity is however highly concentrated in prime locations, mainly Glasgow and Edinburgh. The ripple of growth to other locations is not yet evident and some sectors, particularly those related to the oil industry, continue to suffer from weak markets. The investment markets are responding to inflows of funds to prime sector-regions where the market balance is positive. Even for less well-positioned assets, opportunistic investment interest can be identified. A rapid return to normal economic performance is required in late 2015 and early 2016 to avoid any harm to this nascent property market recovery
The Scottish economy weakened during the first half of 2015. Growth fell to marginal levels, underlying economic activity became very finely balanced and unemployment increased. A “charting” approach might see a cyclical downturn emerging; a more considered approach would recognise that factors such as the downturn in the North Sea oil industry – which affects regional economies beyond Aberdeen – and slowing global growth may have converged during the first half of the year.
Office markets in Scotland’s cities diverged during 2015. Edinburgh is enjoying a period of strong take-up which is rapidly eroding Grade A office supply. Glasgow has experienced a temporary dip in lettings. Aberdeen’s market is weakened by the low oil price. Dundee’s active small office sector is now extending into the market for medium-sized offices.
Continued industrial property market activity in Central Scotland and little new development has led to low vacancy and frustrated demand. Of that property available to the market, only a small percentage is truly prime. There is frustration on both sides of the market as developers juggle appraisals to justify new development at rents which are acceptable to occupiers. The low oil price has adversely affected demand not only in Aberdeen but in supply chain locations throughout Scotland.
In retail, the improving landscape of the Scottish economy over the past three years – the most recent dip notwithstanding – has little positive impact on occupancy rates in town centres.
The continuing uncertainty over Scotland’s political future Post-Referendum as we approach finalisation of the Scotland Bill 2015/16 is undoubtedly having an adverse effect on the Scottish property investment market and as a result, dampening transactional activity.
As investors monitor the wider political developments, it looks likely that the cautious sentiment will continue for the near future or at least until other issues, such as the potential UK Brexit scenario, take precedence. Prime investments will always attract strong demand but the definition of what constitutes ‘prime’ will remain narrow and the fall off in demand and pricing for secondary assets will continue to be more severe than usual.
The absence of speculative development in the office and industrial sectors throughout the Central Belt, and the reduction in prime supply will inevitably lead to improved rental and letting prospects for existing and refurbished stock. There is an added bonus for those investors in the market that these opportunities are available at attractive yields/capital values, both historically and in comparison to similar regional centres south of the border.
Pricing on secondary assets remains quite volatile and the convergence of short income pricing and alternative use values for student accommodation, residential and private rental sector (PRS) should continue to stimulate change of use in a number of these situations.
Now, more so than ever, the Scottish market offers strong performance opportunities for those investors with the benefit of a clear head and a good understanding of the market, able to look beyond the immediate uncertainties.