Steady on? The investment markets in Edinburgh and Glasgow are seen to be improving, but the grim times are far from over. By Stacey Meadwell
It is a new term in Scottish schools, summer holidays are over and it is time to roll up the sleeves and get backto business.As the weather begins to turn,ismarket sentiment changing too?
When agents in Edinburgh and Glasgow were quizzed earlier this year as part of EG‘s series of sentiment surveys, the results made for grim reading – although the Glasgow survey was conducted a few months later than Edinburgh’s, which could explain why those working in that market were slightly less pessimistic.
In this quarter’s survey, the biggest shift in opinion seems to be around the investment market. Thisis being mirrored in many of England’s cities.Itis not thatsurprising when considered with the sharp yield correction, in Edinburgh in particular.
When asked about their expectations for the investment market over the next six months,respondents from both cities have shifted their view from “some worries”to “things are on the mend”(graph 1).
Alasdair Humphery, managing director forScotlandat Jones Lang LaSalle, says: “Despite limited appetite for lending from the main banks and genuine concerns over occupier markets at the start of 2009, investorshave increasingly displayedconfidence in a recovery, probably adopting a view that the pricing of prime markets has corrected sufficiently.”
Time for the cash-rich
Thisis backed up by the survey, with half of Edinburgh’s respondents and a third of Glasgow’sbelieving that the decline in capital values is over. DTZ also predictsthat Edinburgh yields will harden from 7.25% to 7% next year, while in Glasgow, Cushman & Wakefield predicts a sharpening from 7.25% to 6.5%.
So, the view is of a bottoming investment market and perhaps a time for the cash-rich to cash in, asbank funding is still viewed as difficult to come by. But those buying will need to take a longer-term view if sentiment about rents proves to be true.
Again, property professionals from the two cities agreethat commercial rents have not yet hit the bottom of the cycle. The degree of decline is definitely perceived to be slowing, but two-thirds of respondents believe that drops of 5-10% are still on the cards (graph 2).
Research mirrors sentiment.DTZ predictsthat Edinburgh rents will drop by £2 per sq ft, while C&Wpredicts that Glasgow’swill drop by 50p-£1per sq ft next year.
It is, perhaps,good for the prospects of a long-term recovery that developer confidence remains lowand developers are set on seeking planning permissions but not starting construction(graph 3). Respondents seem less confident than they didin the previous surveys, presumably becausethe effects of the recession on banking and business in general are more widely known.
Don Young, senior director of Edinburgh agency and development at BNP Paribas RE,says: “Edinburgh is likely to see speculative office development begin in 2010.”
Thismight just be wishful thinking, given the predicted take-up for offices. DTZ research showsthatoffice take-up is expected to be lower in 2010 than in2009, in Edinburgh, at least.
lFor more on the survey and what property professionals in Edinburgh and Glasgow think of their job prospects,see the Focus blog: www.estatesgazette.com/blogs/focus
Different opinions from the two cities
Edinburgh has its castle, the fringe, tourists and big financial services occupiers, while Glasgow has shopping, a lively nightlife and diverse occupiers, attracted by its cheaper rents. So it is not surprising that opinions differ on the prospects for the two markets.
Those in Glasgow seem more pessimistic. Opinion over the next six months seems to be stuck at “no improvement”, while in Edinburgh, more than one-third of respondents expect a “substantial” improvement (graph 4).
Glasgow has seen a higher proportion of its office take-up from financial services companies than Edinburgh in recent years, which may account for this (see p62)
There are also differences in opinion over where demand will change in the next six months. In Edinburgh, the prevailing feeling is that the office sector will see tenant demand fall further. However, there is greater confidence that the retail sector will see a rise in demand.
In Glasgow, many people believe that demand from retailers will continue to fall, with unit shopping singled out as the cause of most concern. For the office sector, some 40% of respondents – compared with 20% in the last survey – believe tenant demand will rise. Confidence in demand returning for shed space has also improved.
In both cities, the residential sector is singled out as being the most unlikely to deteriorate and most likely to improve.
