IS ABERDEEN (SCOTLAND, UK) BACK ON THE COMMERCIAL PROPERTY INVESTOR’S SHOPPING LIST?
Mark Fleming, director in the investment team at Savills in Scotland.
There has been a notable shift in investor sentiment towards Aberdeen’s commercial property market in recent months and 2018 could see investment volumes returning to, or indeed exceeding, the 10 year average.
The Scottish city is near unique in its abundance of long-term, index linked, income producing assets, that were pre-let and built between 2012-14 to satisfy demand from occupiers who had little to choose from in terms of existing stock at a time when the oil and gas sector was booming.
Global and domestic energy occupiers scrambled to have a foothold in the European energy market capital and at one point in 2013 there was only 10,000 sq ft (929 sq m) of Grade A office space available in Aberdeen to satisfy over one million sq ft (92,900 sq m) of active requirements. As such developers were able to command attractive lease terms (e.g. long leases with index linked reviews), from occupiers who needed to expand and move to better quality offices in order to retain and recruit the skilled workforce necessary to compete in the industry.
The resulting strong rental growth in the face of this overwhelming demand pushed Grade A rents north of £30 sq ft, in some cases reflecting growth of 30 per cent over two years. All this activity and rental growth in turn attracted strong levels of investment activity, driving prime office yields down to 5.5/5.75 per cent and putting Aberdeen on a par with Edinburgh and Glasgow.
Following the crash in the price of Oil (which hit a low of around $28 per barrel in 2015), Aberdeen’s property market suffered a consequential slump in activity where take-up fell and supply of accommodation across all sectors increased. However, in tandem with the strong recovery in the price of Brent Crude seen in recent months – which at the point of writing in January 2018 is hovering around $68 - $70 a barrel – the city’s office occupier market is picking up again. The strong correlation between the price of Brent Crude and office take up is depicted in the chart below: