Data for Scottish commercial real estate released by leading property consultant CBRE reveals that the annual Scottish all property total return for 2018 was 5.6%, only slightly lower than the UK all property return of 6%, while Scotland’s offices, retail and alternatives markets all significantly outperformed the UK. Industrials also had a strong end to the year, achieving the highest return of the three main sectors.
Office and industrials returns have increased year on year, with offices achieving 8.2% compared to 5.9% in 2017, and industrials increasing from 7.9% to 8.6%. Offices were 2.0% ahead of the UK figure of 6.2%, whilst retail returned 4.7% compared to the UK’s -1.1%, and alternatives, which has continued to be the best performing sector in Scotland, and the only one to achieve double-digit returns in 2018, achieved 10.6% compared to the UK’s 7.5%.
Despite weaker performance throughout the year, industrials regained their status as the best performing sector in Scotland, producing total returns of 2.7% in Q4. Capital and rental value growth both saw substantive improvements during the year, with capital values up by 2.5% and rental value growth of 1.0%.
The total return for the oﬃce sector in Q4 2018 was 1.8%, which although below the mid-year highs of 2.4%, marks a signiﬁcant improvement from the lows of 2016 when total returns bottomed out at -2.3%. Despite rental values falling by 1.1% during 2018, capital value growth was 2.8% over the year.
Given the current challenges facing the retail sector, it’s unsurprising that at the close of the year the outlook remained subdued. Despite a drop from 1.0% in Q3 to -1.2% in Q4, Scottish retail outperformed the UK in 2018, most notably for high street shops, which produced an annual return of 4.7% compared to the UK’s -1.1% . The decline in retail capital values accelerated in Q4 with values down by 2.6%, meaning a fall in capital values of 4.2% over the full year. Rental values also declined during the year, by 1.0%.
Compared with performance for the whole of the UK, Scottish returns have been more resilient in Q4. This is best seen within the retail sector where annual returns for the UK have fallen by 2.75% during Q4 compared to a 0.40% fall for Scottish retail. At the all property level, the picture is very similar with UK returns down by almost 1.5% whilst Scottish returns were unchanged.
At a city level, industrials remain the star performer of the three main sectors with both Glasgow and Edinburgh industrials topping annual total returns at 16.1% and 15.3% respectively. In Aberdeen, although total returns were signiﬁcantly lower, industrials at 3.4% still outperformed the other main sectors. Edinburgh oﬃces saw an annual total return of 12.7%, with Glasgow offices at 8.6%. Whilst retail performance was weak at a national level, Glasgow notably bucked this trend at 6.8%. Aberdeen’s weak performance was in part due to a signiﬁcant fall in the retail sector during the last quarter of the year when the annual total return dropped to -6.7%, the lowest on record since 2009. This was driven by a large fall in capital values in the ﬁnal quarter of 2018, down by 8.3% over the ﬁnal three months, leading to an annual decline of 12.2%.
During the last quarter of the year, £642m of stock was transacted in Scotland, demonstrating a strong final quarter, bringing the annual total to £2.49bn in 2018. This is broadly in line with the £2.5bn achieved in 2017. The retail sector total was boosted by the sale of Fort Kinnaird Retail Park, located on the eastern edge of Edinburgh, which was acquired from The Crown Estate by M&G Real Estate for £167.25m. 2018 also stood out due to the lack of any major shopping centre sale, which has traditionally boosted volumes in the sector.
David Reid, associate director, CBRE, said: “It’s great to see the industrial and logistics sector in Scotland performing strongly again during 2018 with sharpening yields and increasing rental and land values within prime locations. With this backdrop we are seeing increasing developer appetite for speculative schemes and there are a number of occupier pre-lets are on the horizon during 2019, reflecting the low volumes of quality stock across the central belt in particular.
“CBRE was delighted to have involvement in the largest occupier transaction of 2018 with the sale of the 129,183 sq ft Vertex warehouse in Eurocentral to Brewdog plc.”