SCOTLAND’S commercial property market showed an “encouraging” six per cent annual total return in 2017.
Data from property consultant CBRE reveals the total 2017 return for Scotland was 6.8 per cent, comparing favourably with the UK’s 10.2 per cent.
Measured by the IPD Quarterly Index, the research found over the fourth quarter, the total property return was 2.1 per cent, up from 1.7 per cent in quarter three. This increase is attributed to improved capital growth, with average capital values up by 0.6 per cent. This represented the bulk of capital appreciation during the year, given the total uplift in 2017 was just 0.9 per cent over the calendar year.
Industrials have been the key differentiating factor in the UK’s relative outperformance against Scotland, with the pace of rental growth in the London and South East industrial markets notably outperforming rental growth in any other commercial real estate sector. However, for some other sectors, the performance gap between the UK and Scotland has narrowed, notably high-street shops and offices.
Office sector total returns for Q4 rose to 2.2 per cent, an increase from 1.6 per cent in Q3, representing the largest quarterly uplift in returns for any of the three principal sectors in Scotland. It was also the highest total return for the Scottish office sector since the final quarter of 2015. This led to an annual total return of 5.9 per cent in 2017, in contrast to -0.2 per cent in 2016. Despite capital value growth throughout the second half, it was not quite enough to reverse the loss incurred in the first half which felt the effects of Brexit.
Total returns in retail saw a slight increase from 1.4 per cent in Q3 to 1.5 per cent in Q4, while the UK-wide figure saw a marginal slip. The annual total return for retail in 2017 was 5.8 per cent, a marked improvement on the one per cent return achieved in 2016. Over the course of the past twelve months, capital growth for Scottish retail has been virtually flat, despite average rental growth on 0.5 per cent over the year.
Once again, industrials were the best performing of the three main sector groups in 2017, producing a total return of 7.9 per cent during the year compared to 4.3 per cent achieved in 2016. Industrials were the only sector to experience substantive capital growth in 2017, with values increasing by 5.5 per cent on average, and rental value up by one per cent over the same period. Like other sectors, growth rates improved during the course of the year. Capital values were up two per cent alone in Q4, leading a quarterly total return of 2.5 per cent.
The industrial markets in Glasgow (14.2 per cent) and Edinburgh (11.6 per cent) were the only two city groupings to achieve double-digit returns in 2017. The market in Aberdeen continues to lag significantly behind the central belt cities, but at 2.8 per cent the industrial sector is now producing positive returns. Aberdeen’s other two sectors remain weak, with the retail sector just slipping into negative returns once again.
Steven Newlands, an executive director at CBRE, said: “These results are encouraging for the investment market in Scotland, where sentiment improved following the general election result last year, which reduced, in investors’ eyes, the likelihood of a second independence referendum.
“It should be noted that Scottish property continues to offer good value to investors and is trading at a discount comparable to properties south of the border.”
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