By John Rae, Capital Markets Partner and Head of Glasgow, Knight Frank

It’s fair to say that Edinburgh has stolen the limelight in Scotland’s commercial property scene during 2016 – it’s been a stand-out year for the city, with investment hitting a ten-year high. Across the M8, on the other hand, transaction volumes have been appreciably lower, with many of Glasgow’s biggest assets not yet ready to trade.

However, as they begin to fully let up, the normal chain of events suggests that could well change in the not-too-distant future.

How this pans out is important for two reasons: firstly, it will be a real litmus test for interest in the city and the pricing of some of its prize office assets. Secondly, the proceeds from these sales could fund the next tranche of much-needed office developments, with Grade A, city-centre office space currently at a premium.

On the first point, while there has undoubtedly been caution in the aftermath of Brexit, there has been strong interest in Glasgow. Among the big-ticket transactions of the year so far have been 2 West Regent Street, sold to TIAA Henderson for £31.5 million with a net initial yield of 5.84%, and the Grosvenor Building on Gordon Street was bought by UBS Asset Management for £17.85 million, reflecting a yield of 6.9%.

These deals demonstrate two of the major trends in, not only Glasgow’s, but Scotland’s commercial property: the first being keener yields on city-centre assets compared with other UK regional centres. Prime yields in Glasgow are now at around 5.5%, a relative discount to the likes of Manchester, Birmingham, and Leeds.

The second, and partially as a result of Glasgow’s price-competitiveness, is the prevalence of overseas money coming into the city’s property. Last year foreign buyers accounted for more than a third of purchasers – and this year’s deals have continued in the same vain. The Ca’d’oro building, opposite Central Station, was sold at the beginning of 2016 to a private overseas investor, while 5 Cadogan Street was also purchased off-market by a similar buyer.

Overseas investment in the city only looks likely to continue, with more Middle Eastern, Asian, and European money flowing into the city. Brexit, while causing uncertainty, has significantly reduced the value of the pound and made UK property assets cheaper. Undoubtedly there is some risk as negotiations over Britain’s exit from the EU unfold, but there is also an opportunity to buy assets while they are more favourably-priced.

Adding to Glasgow’s attractiveness are its fundamentals, which remain strong. The lack of Grade A stock in the city centre has intensified competition for the best space; a situation exacerbated by the fact that no new schemes will come on-stream for the next 24 months. Pre-lettings, which have been rare in the city to date, are a real possibility in the next couple of years for larger occupiers.

However, the lack of new developments coming to the market has created an opportunity for others. To date, the story of Glasgow’s commercial property, from an occupational perspective, has been refurbishments; which have popped up across the city – from 100 Queen Street to Tay House. Combined with the lack of space, these properties will drive rental growth in the Grade “B+” market, which could see rents hit the mid-£20s and higher, with incentives being reduced.

The next 12 months will be telling for Glasgow’s commercial property market. While 2016 has been relatively quiet on the deals front, we expect activity to pick up in H1 2017. Overseas purchasers are likely to characterise activity in the foreseeable future, with yields falling more in line with other major UK cities. But, whatever happens, deals will need to be done to unleash Glasgow’s potential.