Aberdeen is all about energy and oil, but residential experts are starting to get a bit worried about the hot air in the city.
The city’s new-build volumes, residential transactions, sale prices and average rents are all well up, but they combine to present the city with an unusual challenge – how can the UK’s energy capital cope with an extraordinarily strong housing market recovery?
No one has said the word “bubble” yet, but the challenge for Aberdeen’s housing market is to prevent its current strength going too far. With CALA marketing five-bedroom new-builds at well over £1m and the emergence of buying agencies and an international school to cater for the glut of affluent overseas families moving to the area, there is plenty of fodder for pessimistic analysts (see below).
On the surface, Aberdeen is an undiluted economic triumph. Unemployment is 1.8%, less than half Scotland’s average; the average salary is £32,000, well above the UK norm of £26,600; Aberdeen docks handle a record 5.14m tonnes of cargo a year; and gross value added per head of population is the UK’s highest, bar central London.
That success – a trend since the 1970s but gathering pace over the past year – has inevitable effects on the housing market. Transaction volumes in Q2 2013, the latest available, were up a quarter on a year earlier, and apartment sales were a staggering 54% higher than in the first quarter, according to the Aberdeen Solicitors Property Centre.
The average property price in the city has risen by more than 4% in the past year, in contrast to falls of 3.4% in Edinburgh and 1.3% in Glasgow, according to the Registers of Scotland. Longer-term figures from Nationwide show Aberdeen property prices have more than doubled since 2003, compared with 31% and 29% for Edinburgh and Glasgow, respectively.
“Prices in prime Aberdeen, like the West End, peak at £400 per sq ft,” says Faisal Choudhry, head of Savills’ Scottish research team. “Even the mainstream is achieving over £200 per sq ft, which wouldn’t embarrass mainstream Edinburgh or Glasgow. Low supply means there is pent-up demand.”
The lettings market is strong, too, with Aberdeen’s typical rents rising by 5.9% in the year to August, more than Edinburgh or Glasgow, according to lettings agency Rettie & Co.
Little wonder, then, that builders are in chipper form. CALA Homes – the company name is an acronym for City of Aberdeen Land Association, bought by Legal & General Group earlier this year – is building a 415-unit scheme near the city centre. “Prices and sales in and around the city have remained steady throughout the financial downturn,” says CALA’s regional director, Mike Naysmith. “In the last year, we’ve seen significant acceleration in demand, largely attributable to growth in the oil and gas industries.”
In an echo of central London’s recent residential development boom, Naysmith says: “Most of our homes in Aberdeen are sold off-plan, often six months before the move-in date.” One scheme’s show home even went to sealed bids.
Isle of Man-based builder Dandara has also seized on Aberdeen’s market strength. It recently built 300 units in the city – some apartments, but mostly four- and five-bed houses – and has won consent for 350 units on a prime site in the city’s West End, where construction will start in late 2014.
“Average disposable income is significantly above the UK average thanks to the highly skilled energy sector,” says Dandara’s Aberdeen managing director, Gavin Wyley. “This, coupled with the oil industry’s continual drive to attract workers, drives demand for new homes.”
So far, so buoyant. But Aberdeen’s downturn-defying success is creating its own challenges.
Recruitment problems
Firstly, builders are having difficulty recruiting sufficient numbers and skill types. Barratt Homes’ regional director, Doug McLeod, says: “We’re almost back to pre-2008 levels, but throughout Scotland the government targeted 25,000 new homes a year and the best achieved was 16,000. I think every company lost 30% to 40% of its labour force.”
McLeod says competing with highly skilled, high-paying energy employers means builders must pay staff more, making Aberdeen the most expensive area in the country for build costs.
Secondly, like most of the UK, there is a need for housing land to be identified. Such is the growth in the population and energy-fuelled economies covered by Aberdeenshire and Aberdeen councils – they have adjoining but not overlapping boundaries – that they have produced a new Strategic Development Plan just four years after a previous structure plan was adopted (see box above).
The third challenge facing Aberdeen’s housing market is overheating. John MacRae, chairman of Aberdeen Solicitors Property Centre, says: “The increase in activity is welcome, but there is concern that the [house price] figures, if maintained over several quarters, could lead to overheating.”
KPMG warns that the city must attract 120,000 more oil and gas workers – the size of the present workforce – by 2022 if it is to remain a global energy hub.
There is no doubt Aberdeen is on the move – but is it growing too quickly for its housing supply?
Housing land required
In the new Strategic Development Plan, Aberdeen city and its surrounding county require just under 54,000 new homes by 2035 to cope with a 7% increase in population from 465,000 to 500,000. Its land supply targets are even higher – sites are being identified for more than 67,000 homes by 2035.
The plan suggests sites for 31,500 homes will be within Aberdeen’s existing boundaries, one-third on brownfield sites – including part of a city centre regeneration – and two-thirds on greenfield. The rest is earmarked for three sites stretching from the city.
The largest out-of-city concentration of housing will run from Aberdeen’s southern boundary, past Stonehaven to Laurencekirk. This will include a new town of 5,600 homes at Portlethen, seven miles from Aberdeen.
The other sites are north-west of the city towards Huntley, which will also see infrastructure improvements to link Aberdeen and Inverness via an improved A96, and north-east towards Peterhead, where residential development will be part of a “potential global hub for the energy sector”, say planning authorities.
Residential players have welcomed the council’s thinking, but stress that early parts of the plan are extremely ambitious – 16,500 of Aberdeen city’s 31,500 homes are targeted to be built by the end of 2016, with the rest built over the following 20 years.
