Nearly £1.5bn was invested in Scotland’s commercial real estate during 2023, falling by just over a third year-on-year, according to new research.
However, findings from Savills showed a “marked improvement” in H2 compared with the first half of the year, as well as a 39% increase on H2 2022, leading to hopes of a rebound this year.
Retail outpaces offices
Savills noted that despite a national decline in retail investment, the asset class saw transactions totalling £714m in Scotland during the period. That was more than 50% up on offices, which saw £357m of deal activity.
This was followed by industrial, leisure and alternatives at £172m, £144m and £105m, respectively.
Savills said the retail sector’s popularity was largely due to the strength of Scotland’s occupational market, particularly in locations such as Buchanan Street in Glasgow and George Street in Edinburgh, both of which have posted rental growth as a result of a lack of supply.
Researchers added that pricing has corrected since the pandemic.
In terms of buyer type, overseas investors were found to be the most active for a second year running, accounting for almost 46% of all transactions at £680m.
However, Savills said it represented a considerable decline on 2022, when more than £1bn of foreign money was spent on Scottish commercial property.
Property companies (£342m), private investors (£187m) and UK institutions (£127m) were also active in the market.
Aly Wright, director in the Scottish investment team at Savills, said: “As we know the investment market across the UK has been impacted by ongoing uncertainty, with pricing yet to find its footing. However, Scottish investment figures have remained relatively robust at only 27% below the 10-year average.
“What is also interesting to note is the type of asset investors are buying, with retail investment in Scotland seeing the highest level of transactions since 2016.
“Although we continue to see uncertainty in the office sector, given the drive to repurpose obsolete stock, the investment rationale for up and built, well-located product will become increasingly compelling moving forward, compounded by an extremely limited development pipeline across Scotland’s main centres.
“All things considered, 2023 was a relatively positive year, and whilst we anticipate a slow first quarter of 2024, we are positive this will pick-up post-Easter as markets continue to stabilise.”
Edinburgh demand rises but Glasgow drops
Separately, findings from Knight Frank, which similarly showed that overall investment volumes in Scotland tallied £1.5bn last year based on figures from Real Capital Analytics, found that investment in Edinburgh rose by 23% to £686m during the period.
Investment in Glasgow plunged by 72% to £330m, while activity in Aberdeen dropped by 63% to £84m. Researchers at Knight Frank said both markets had a “strong year in 2022 to compare with”.
Knight Frank head of Scotland commercial Alasdair Steele said: “The last 12 months have seen a huge change in the investment landscape, with interest rates rising 14 times in a row between late 2021 and August 2023.
“That has inevitably had a big impact on the market and many property owners have decided to hold onto their assets – where they can – until there is a greater degree of certainty, while many buyers also paused until borrowing conditions improve.
“With signs that interest rates may have peaked and the economy is beginning to pick up, there are reasons for cautious optimism about 2024. There are a good number of assets currently on the market which should transact in the first half of the year and there are potential buyers showing more interest.”
Steele added that there could be a rebound from the investment volumes of last year, as the cost of borrowing and interest rates on bank deposits both reduce and commercial property becomes more attractive to investors.
He said: “It is likely to be a gradual improvement rather than a sudden opening of the floodgates, and we would expect the primary focus to be on good quality, fit-for-purpose assets across various sectors of the market.”
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