Mixed reports on Scottish commercial property

The Commercial Property Market Survey carried out by the Royal Institute of Chartered Surveyors (RICS) found that both the investment and occupier sides of the market have been affected by the change in sentiment and both rent and capital value expectations are now in negative territory.

Conversely Knight Frank have today released figures which appear to contradict this trend.

Although opinions are mixed, the largest share of respondents to the RICS survey across the UK (36 per cent) feels the market is now in the early stages of a downturn. All parts of the UK saw an increase in the proportion of contributors sensing the market is turning down. London exhibits the highest proportion, with 54 per cent of respondents taking this view.

During Q2 2016, investment enquiries fell sharply across Scotland with a net balance of 40 per cent of respondents reporting a decline in enquiries. All sectors covered by the survey suffered a drop in investor demand, and foreign investor appetite in Scottish commercial property also declined at significant rate with 24 per cent more respondents to the survey seeing a drop in interest.

With investment demand falling right across the UK, capital values are expected to decline, albeit moderately over the year ahead in almost all areas of the market. Values in the secondary retail and office segments are expected to see the most visible decline.

Political and economic uncertainty is also hitting confidence on the occupier side of the market. In Scotland, occupier demand dropped for the first time since Q3 2014. A cautious demand backdrop is producing significantly weaker rental projections across the board. This is especially the case over the shorter term with 31 per cent more respondents now expecting commercial rents in Scotland to decline over the coming quarter. This stands in stark contrast to Q1, when 17 per cent more respondents anticipated rents would increase in the near term.

The office and retail sectors experienced the steepest decline in rental projections with the reading for both now well in negative territory. Across the UK, rent expectations are most negative in London, pointing to a fall of around 3 per cent over the next 12 months at the headline level. Secondary retail rents are expected to suffer the largest decline in the capital.

Jeff Matsu, RICS senior economist, said: “Political and economic uncertainty in the aftermath of the referendum result has clearly dampened sentiment in the commercial property market, with the tone becoming visibly more cautious right across the UK. Although the impact is widespread, the drop in confidence has been most pronounced in Scotland and London.

“Nevertheless, following several years of strong capital value and rental gains, momentum had already appeared to be slowing. Whether or not the sharp deterioration in the RICS survey data is a kneejerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen.”

However Knight Frank’s figures show that Edinburgh’s commercial property market saw a positive second quarter in 2016, registering robust take-up despite subdued market sentiment.

Professional services and technology, media and telecomms (TMT) companies continued to dominate the market, accounting for about a third of take-up in the three months, April – June 2016. In total, 180,000 sq. ft. of space was let in the city centre, following a high number of lease renewals. This was largely in line with 2015’s performance, which turned out to be a record year.

Toby Withall, Office Agency Partner at Knight Frank in Edinburgh, said that deals continued to brew in the capital, which appear to be unaffected by Brexit.

Toby said: “The outlook for Edinburgh remains positive, despite the uncertainty hanging over the market following the EU referendum – several significant deals look likely to go ahead, which can only be a vote of confidence in the city. However, it’s still too early to say what Brexit’s full impact is likely to be.

“The fundamentals of the market remain strong and the lack of Grade A office space in Edinburgh city centre is pushing up rents – £33 per sq. ft., previously considered ‘super-prime’, was achieved in the city during Q2. As Grade A space continues to be squeezed, this is only likely to continue.

“There is little coming through on the supply side and demand remains steady – particularly from the burgeoning TMT sector. There are a healthy number of requirements being circulated, although this should be treated with a note of caution – a decent proportion of these are potential renewals for Q1 and Q2 2017.”