PUBS, care homes, students flats and hotels are outperforming traditional property sectors, according to a new report.
Research by leading property consultant CBRE reveals Scottish commercial property had another positive quarter at the start of the year, reflecting wider improvements reported for Scottish GDP.
The Scotland Property Quarterly report shows the performance across the three main sectors of office, retail and industrial property was average with very little change.
It was the “alternatives” sector – a mixture of smaller, specialist real estate types ranging from student accommodation and care homes to pubs, hotels, leisure and roadside services – that outperformed everything else in the first quarter with returns of 4.0%, and 13.2% over the 12 months to the end of March.
In the first quarter of 2018 total return for all Scottish property was 1.7%, down from the 2.1% achieved in the final quarter of 2017, but ahead of the 1.5% return from the first quarter of 2017.
On an annual basis, most sectors in Scotland saw an improvement in returns. For all property, returns rose by around 25 basis points over the quarter to stand at 7% for the twelve months to the end of March. This contrasted with the UK, which saw annual returns dip lower over the same period.
Total returns for Scottish retail in the first quarter were 1.2%, a slight decrease on the 1.5% total return in Q4 of 2017. The annual total return for retail over the year to the end of March was 5.4%. Last year, capital values for retail in Scotland were, on average, flat.
Performance has edged lower this year due to weakening rental growth in the first three months of 2018.
However, these overall figures for retail are somewhat misleading given the diversity of local and sub-sector performance. This is evident in the data for capital growth in Scotland, with retail warehouses values virtually flat (-0.1% over Q1), compared to more robust growth for high street retail (0.9% growth over the quarter). Scotland saw the fastest capital growth for high street retail in the UK, outside of London.
Office market performance in the first three months of this year reflected the shifts seen for all property.
Returns dropped back to 1.6% in this period, the same rate of return that was achieved in Q3 2017, and down from the 2.2% return in the final quarter of last year.
Rental growth remained in negative territory, but this is not typical of market conditions in the larger office markets of Glasgow and Edinburgh.
Industrial capital and rental values were virtually unchanged during the first quarter of 2018. As such, the sector had to rely solely on the income return of 1.5% in order to achieve a total return of 1.4%. Over the past twelve months, the sector remains the strongest performer of the three main sectors, with an annual total return of 8.1% during the year to the end of March.
Aileen Knox, senior director at CBRE Scotland, said: “The returns for alternative property have been very impressive so far this year with the sector now forming an increasing share of the real estate market.
“Around the start of the century, alternatives accounted for just 6% of the properties in the sample but now in 2018, it forms 19%.
“Our data also reflects the growing importance of alternatives as an asset class for investment purchases; as our analysis demonstrates, more money was invested into Scottish alternatives in 2017 and in Q1 2018 than went into the retail sector.”
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