The latest Scotland Property Quarterly report from leading property consultant CBRE shows the momentum gained in 2013 has continued into the first quarter of 2014 with further improvements in investment performance.
The all property total return for Q1 was 2.8%, down slightly on the 3.3% in Q4 2013. This brings the annual total return through to the end of March to 10.0%, which is well ahead of the 0.2% at the same time in 2013. This level of performance is consistent with wider signs of economic and occupier recovery that has been observed in Scottish commercial property since spring in 2013.
Relative to the UK as a whole, Scottish property continues to underperform, although the gap is beginning to close, particularly within the retail and industrial markets. Scottish retail is currently the closest to UK rates of return, with an annual total return to the end of March of 8.6%, compared to a UK wide return of 10.0%.
Across all sectors Estimated Rental Value (ERV) growth remained weak in Q1. The already slow rates of growth that emerged over the second half of 2013 have fallen back during the first quarter of 2014. As a result the all property capital growth rate of 1.2% was exclusively driven by inward yield movement, caused by the weight of money seeking opportunities in the Scottish commercial property market. Nevertheless, this pace of growth marks the third successive quarter of rising capital values, which will be only boosted further once more substantive rental growth begins to emerge.
On a quarterly basis, retail performance edged down a little in Q1 to post a total return of 2.3%, down from 2.8% in Q4. Capital growth for retail was the weakest of the three main sectors, with values up just 0.8% since the start of the year. A lack of any rental growth over the last six months, and more modest yield contraction, have contributed to this underperformance.
Whilst all sectors have seen lower total returns in Q1 compared to the previous quarter, offices have been the most stable. The total return in Q1 was 3.3%, down from 3.6% in Q4. As with retail, this performance has been driven by yield contraction alone.
Scottish industrials were once again the strongest performing sector in Q1, delivering a quarterly total return of 3.9%, although down from 4.7% in the previous quarter. Compared to both offices and retail, industrial benefited from 0.3% of rental value growth during the quarter, which assisted in pushing capital values up by 2.2%.
Aileen Knox, senior director from CBRE, commented on the report: “Little has changed in the relative performance between cities in Scotland, with Aberdeen offices and industrials continuing to show the greatest performance.
“The office market in Aberdeen is the top performer with annual total returns to the end of March pushing ahead of the 20% mark, comparable to markets in the south of England such as Cambridge. Industrials in Aberdeen, at 18.8%, are not far behind. Edinburgh offices is the only city sector that comes close to this level of performance, with an annual total return of 14.7%.
“Retail returns across all three cities hasn’t been as strong, but there is now a little more variation between cities that was not as evident last year. Edinburgh retail in particular, with an annual total return to March of 9.3%, is now beginning to catch up with other sectors in Scotland.”