How will the credit-crunch, stock market jitters and profit warnings affect the Scottish market in the coming months? Softening yields and rental growth are predicted for Edinburgh and Glasgow.
News business pages have been littered with headlines decrying a banking system in crisis and economic wobbles.
Edinburgh’s office market is only just getting back on its feet again after years of stagnation, and has an occupier base dominated by the finance sector, while Glasgow has been enjoying a bull run. So how will it cope in the current climate, and what are the prospects for the coming year?
The answers come with an underlying confidence from most, although some are already shying away from making predictions, saying the current conditions make it too tough to call. Or perhaps they are more worried about their own share values, as recent reports have shown that property firms are not immune to the troubles.
Investment
The Scottish investment market has already taken a hit, with yields softening in June and July, although most attribute this to a price adjustment following a period of capital growth. The consensus seems to be that the market will recover relatively quickly, although Colliers CRE is predicting softer yields across all sectors next year.
Dermit Smith, Colliers director of investment, says that risk will play a bigger part in determining yields. He says that, at the moment, investor sentiment is dictating the pace of change, with a disconnection between purchaser offer and vendor expectations. He says: “Market activity will only improve when these elements converge. This will need valuers to adjust investment yields northwards when, in many cases, portfolios are revalued at the end of each calendar year. I would expect to see more investment market activity during the early part of 2008.”
Likewise, Stephen Slevin, senior manager, property lending, at Dunfermline Building Society, is confident of a quick bounce-back. “The credit crunch is very much a short-term thing,” he says. “With that backdrop, we are still looking to lend against commercial property. We are still doing deals that are as competitive as we’ve ever done, but as long as it is the right person and we see a strategy for moving the product forward.”
Edinburgh
It may be too early to determine how the financial turmoil is affecting Edinburgh’s financial businesses, but it has not stopped bullish predictions on office rental growth for next year.
At the start of the year, Colliers was predicting rentals of £28.60 per sq ft on lettings over 10,000 sq ft. A sub-5,000 sq ft letting at Edinburgh Quay 2 in Fountainbridge has already achieved £28.50 per sq ft.
Hamish Sutherland, associate director at Colliers, says: “During 2008, we predict that Edinburgh grade-A rental growth will reach £31.25 per sq ft, which will be a new high for the city.”
This appears to be a bit of leap for the market, which has only just started to see rental growth again. Nonetheless, Sutherland is confident and puts the bullishness down to the fact that building completions due for 2008 are now running over into 2009, which will mean little space becoming available next year.
And with take-up on schedule to pass the 10-year average again, upward pressure on rents is expected.
Glasgow
Glasgow’s performance in the office market has been overshadowing Edinburgh’s. Office rents are close to matching those in the Scottish capital – unheard of for many years.
And, as in Edinburgh, there is an optimistic outlook for next year. CB Richard Ellis research points to grade-A rents rising by £1.25 per sq ft to £28.25 per sq ft next year, putting Glasgow on a par with Bristol, ahead of Leeds and just behind Edinburgh, Manchester and Birmingham.
Phil Reid, agency director at CBRE, says that the city needs to cement this top level and, as there is only one grade-A building available at 4 Atlantic Quay, and with no further completions due until late 2008, it is possible that this level could be exceeded.
“Even if occupier activity reduces in the city due to wider macro-economic factors,” he says, “the lack of grade-A supply should see an underpinning of the 2007 grade-A rental level of £27.50 per sq ft, and probably rental growth.”
As in Edinburgh, take-up is predicted to be robust and to exceed last year’s levels during the final quarter of 2007.
Vox Pop
“Such fluctuations in the money market have an effect on the underlying confidence in the property market in Scotland. Values have been moving in the past nine months, which has resulted in fewer investment transactions.
“Transactions are still happening – albeit by the braver and more entrepreneurial property companies, who will look at the present climate as a good opportunity to buy value (for example, REIT Asset Management). Well-financed property companies who are not heavily reliant on debt will pick up on transaction activity.
“In time, the market will come back and be attractive to companies like Kenmore and Kilmartin.”Chris Macfarlane, partner, King Sturge (1)
“The Northern Rock situation shows how fragile consumer confidence is at present, but I believe there is still significant institutional, property company and private-investor equity seeking to invest within the sector in Scotland.
“However, restrictions on lending, lack of confidence and increased borrowing costs will increase the likelihood of a drift outwards of yields for secondary stock.”Alasdair Steele, investment director, DTZ (2)
“The tighter credit market means that the era of cheap and plentiful debt for property investment has passed. Debt will be less readily available and its cost should bear a closer relationship to risk.
“Tighter credit conditions could also affect the availability of finance for development projects and, thus, the future supply pipeline of new commercial floor space.
“Before the latest bout of capital market volatility, our expectations for property yields were a gradual outward movement and an increase in the spread between prime and secondary property. We now need to ask whether recent financial market developments make a sharper adjustment over a shorter time period more likely.”Miller Mathieson, senior director, CB Richard Ellis (Scotland)(3)
“The increase in yields (and drop in values) witnessed over the past three months is logical repricing from four years of yield compression against six base-rate increases.
“The recent bank credit problems should not affect the market further. Private investors and property companies remain keen to invest and financial institutions keen to lend following the repricing, as occupier demand and rental growth (the fundamentals of property investment) remain robust.”Stewart Sheridan, partner in charge of the investment department, Culverwell (4)
