After another year of elections and global political turmoil, and with numerous agents issuing their annual and quarterly updates, it seemed a good time to see how the Edinburgh property market has been faring.
While the agents are generally optimistic for the city, given its strategic importance as Scotland’s capital and attractiveness to the fast growing TMT market, there is a general consensus that the uncertainty surrounding the 2014 independence referendum, continued calls for a second referendum, Brexit and the weakening economy have had a dampening impact across the UK which looks set to continue in the near future and to which Edinburgh is certainly not immune. That said, Edinburgh appears to be bucking the trend (or at least performing better than other cities) in a few areas.
In the office market, demand for Grade A office space continues to rise, with recent movement in Edinburgh mainly being from smaller occupiers (taking under 5000sqft) being active in the market rather than the figures being propped up by a small number of large occupier transactions. Space in prime locations, however, is in short supply which, coupled with a trend towards conversion of town house stock back to residential and hotel use and an apparent unwillingness of institutional investors to fund speculative development in Scotland, is leading to increased competition. That said, there are a number of developments in the pipeline in Edinburgh which should hopefully ease pressure over the next few years, including Chris Stewart Group’s The Mint Building and Greenside, GSS Development’s 2 Semple Street and Quartermile 3, which are expected to add c 36,000, 60,000, 37,000 and 73,000 square feet each.
As a result of the tightening market, the city’s vacancy rate is falling (with some quoting it at 4.5%), although there are signs that rental growth is slowing (prime, city centre locations are currently being quoted at @£31 psf). While Tenant incentives are less than may have been expected in recent times, the continued political upheaval has meant that Landlords are finding that flexibility for occupiers is becoming an increasingly key feature of lease transactions.
The industrial market across Edinburgh and central Scotland generally, while flourishing in prime locations, is also suffering as a result of supply shortages with occupiers finding limited options available to them by way of new or recently refurbished stock. Speculative development remains rare as those who were often willing to undertake it in the past (institutional investors) are reducing their exposure to the market either as a result of the recent political uncertainties or because reduced rental schemes and increased costs make them much less attractive. There are, possibly as a result of the all-time lack in supply, signs of some operators coming back with a number of developments, including Southwark Development’s in Loanhead and Fusion Assets’ at Link Park amongst others, in the pipeline. Rents are quoted at @£7-8 psf but are expected to fall over the next few years.
Last year’s growth in the retail market seems to be stalling amid increasing reports of lost consumer confidence and lower sales figures following Brexit, the continued expansion of online retailers and the increasing cost pressures facing ‘bricks and mortar’ operators. High profile failures like BHS and cost cutting exercises by the banks are also taking their toll on the sector. Again, Edinburgh is proving more resilient than a number of other towns and cities but prime, central location is still the number one focus for retailers and a number of peripheral areas are starting to feel the pressure. City centre retail rents are currently strong, but are not expected to rise over the next few years.
While there are a number of extremely large retail developments across Scotland either in progress or about to commence, the largest currently has to be the development of Edinburgh’s St James Centre for retail and leisure which is estimated to be adding over 850,000 sqf to the market (although this is, of course, replacing the recently demolished shopping centre previously on the site).
Overall, property investment returns across office, industrial and retail are much lower than in recent years but Edinburgh is certainly performing better across the board than Scotland as a whole.
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