In recent times, the commercial investment market has seen its fair share of ups and downs, heavily influenced by various macro-economic factors. This trend has been particularly notable in the office sector, which witnessed a significant drop in transaction volumes last year due to a lack of confidence among investors and an uncertain economic environment.
Specifically, in Scotland, investment in office spaces declined dramatically by 42% compared to 2022. This downturn was largely due to buyers and sellers adopting a ‘wait and see’ strategy. At the end of the first quarter of this year, prime office yields in Edinburgh and Glasgow were recorded at 7% and 7.5%, respectively. These figures represent an increase of 200 basis points since August 2022, highlighting a notable shift in yield outcomes for regional offices.
Signs of Recovery
Despite the previous setbacks, Savills is predicting a growing optimism among investors about the economic future. This positive shift in sentiment is partly due to expectations of a decrease in interest and swap rates towards the latter part of the year. Such financial adjustments could stimulate more activity within the office market sector in the second half of 2024.
Up to now, buyer hesitancy has persisted as the market continues to stabilise prices. However, as significant properties in Scotland begin to change ownership in the upcoming months, these transactions are expected to set a precedent for future deals, enhancing overall market confidence.
A Surge in Confidence
Interestingly, office buildings in Scotland that once struggled to attract investors are now surpassing price expectations. While these prices have not yet returned to their peak levels of late 2022, the current rates are noticeably more favorable than just a month ago. This upturn presents a crucial buying opportunity, as costs are likely to increase with the anticipated reduction in borrowing costs. This scenario encourages sellers to set their prices at this new equilibrium, reflecting a real-time market value determined by willing buyers and sellers.
Historical Context and Future Prospects
Looking back, historical data from the Global Financial Crisis (GFC) in 2009 shows that prime office pricing recovered swiftly post-downturn, with prime regional yields increasing by 125bps from July to December of that year. This rapid recovery suggests a potentially quick rebound for the Scottish office market as well.
Moreover, the office spaces in Edinburgh and Glasgow have demonstrated resilience. Edinburgh reported a take-up of 649,000 sq ft in 2023, only slightly less than the previous year. Glasgow, despite a lower take-up of 310,000 sq ft, witnessed several significant transactions. Most notably, the prime yields currently do not fully reflect the potential for rental growth, indicating promising prospects for future pricing.