A lack of suitable office space in Scotland’s key cities, combined with rising rents, is leading to companies looking to take offices in locations outside the city centre, according to Savills Scottish Office Market report.
Savills says take-up of office space outside the central business district’s of Aberdeen, Edinburgh and Glasgow was 4% higher in the first quarter of 2016 than the previous quarter. The firm believes this trend is set to increase as occupiers continue to be attracted by the low rents on offer in out of town locations, where in some cases there can be a 50% discount on the £30 per sq ft prime rents being achieved in the city centre.
“The out of town markets are on the cusp of experiencing a resurgence in popularity, particularly in Edinburgh and Glasgow”, says Mat Oakley, head of commercial research at Savills. “This is primarily due to occupiers being able to save money on rents compared to inner city locations.”
As a result Savills predicts Scotland’s strongest rental growth could be seen in the out of town markets of both Edinburgh and Glasgow, where rents in the early £20’s could be achieved in the next three years.
Savills research shows demand for office space across Scotland has increased significantly this year: Glasgow has seen approximately 300,000 sq ft (27,870 sq m) of space let in the first quarter of 2016 alone, more than half of the total amount of space taken in the city during the whole of 2015. Edinburgh, meanwhile, saw its second strongest quarter of leasing activity since 2013 in Q1 2016, (324,000 sq ft / 30,100 sq m).
According to the report, this spike in demand, combined with further employment growth and falling availability of Grade A space, has led to a squeeze in supply. Total supply in Glasgow has now fallen below two million square feet for the first time since 2011, with only approximately 500,000 sq ft (46,450 sq m) of Grade A space available. In Edinburgh availability has steadily fallen since its peak in 2008. Savills estimates that there is now only 2.1 million sq ft (195,100 sq m) of office space available across the city’s combined central business district and out of town markets, of which only 365,000 sq ft (33,910 sq m) is Grade A.
Scottish office investment volumes have stayed healthy, with just over £811 million transacted in 2015, 33% above the long run average, and just over £300 million transacted in Aberdeen, Edinburgh and Glasgow in the year to date. Prime yields have fallen in Edinburgh and Glasgow, leaving both markets at 5%. However, Aberdeen’s recent slowdown in leasing activity has seen yields there rise from 6% to 7% over the last two years.
Of all Scottish office investments in 2015, 44% were by non-domestic investors according to Savills research. Figures show this has continued into 2016 with 89% of all purchases made by non-domestic investors. Savills attributes this to a combination of UK institutional investors being quiet in the run-up to the EU referendum and overseas investors, undeterred by the forthcoming EU referendum, being attracted by recent high levels of development activity in Scotland and the promise of continued solid rental growth.
Nick Penny, director in the investment team and head of Savills Scotland, comments: “The national trends do seem to point to non-domestic investors being less concerned about the outcome of the EU referendum, and in some cases actually seeing it as a buying opportunity, with evidence that investor demand for the Scottish cities has been less affected by the Brexit debate than other locations. Scottish office investments still look cheap in comparison to the English cities. This, and the solid rental growth story, will continue to attract investor interest in Scotland’s prime office markets.”