2015 a strong year for commercial property

A total of £2.2 billion was invested in Scotland’s commercial real estate in 2015, a 41 per cent decrease on the record £3.5 billion invested in 2014, making 2015 the second strongest year for commercial property investment, according to the latest research from CoStar Group, the leading commercial property information provider.
Expenditure by foreign investors rose marginally by three per cent whereas investment from UK-based investors fell 46 per cent in 2015. However, Glasgow and Edinburgh offices achieved a record year by receiving a combined total of £736 million in investment, whereas Aberdeen offices fell 78 per cent from £526 million in 2014 to £118 million in 2015.
Foreign buyers accounted for 34 per cent of the purchase volume, up from 20 per cent in 2014 and its five-year average of 19 per cent. In addition, a sum of £956 million was spent on offices in 2015, which was 44 per cent above the five-year average.
Grant Lonsdale, real estate analyst, CoStar Group, said: “Though investment into Scottish commercial property fell 41 per cent year-on-year, 2015 was still the second strongest ever year for investment as assets in both Glasgow and Edinburgh are attractively priced compared to English cities. The occupational markets in both cities are strengthening and there continues to be demand for prime stock and value-add opportunities in the office sector, particularly as the next supply wave is still a few years away.
“There is no longer any brand new office space coming to the market in Glasgow and Edinburgh as the three buildings set to deliver in 2016 are entirely pre-let, although there are a number of refurbishments underway which could fill the supply gap. For these reasons growth in both prime and average rents can be expected. However, investment activity across all sectors in Aberdeen has dropped dramatically which can be largely attributed to the collapse of the oil market.”
The top Scottish investment deals from all sectors included; Ennismore’s purchase of Gleneagles hotel from Diageo selling for over £130 million; Harbert Real Estate Fund IV acquisition of Eastgate Shopping Centre, Inverness for £116 million from BMO Real Estate Partners and a private overseas client of HSBC purchase of the Edinburgh headquarters of Standard Life on Lothian Road for £93.7 million.
Foreign investment accounted for 21 per cent of the purchase volume for the deals which took place in Glasgow. The largest office deals were M&G’s £72.6 million purchase of Aurora, Bothwell St, Glasgow; Moorfield’s £60.7 million purchase of 1-3 Atlantic Quay and Amundi’s £33.4 million acquisition of Equinox.
In Edinburgh, office investment rose marginally to £374 million in 2015 which was also the strongest year since 2008. The £374 million invested in 2015 was 80 per cent above the 5 year average of £208 million as foreign investors took 40 per cent of the purchase volume. The largest office deals of 2015 in Edinburgh were the purchase of Standard Life’s HQ for £93.7 million, Rockspring Property Investment Managers, acquisition of 1 Tanfield from Carlyle Group for £56 million and Cording Real Estate Group’s £32.2 million acquisition of Westport 102.
Investment volumes across all sectors in Aberdeen were down 80 per cent from more than £800 million invested in 2014 to only £162 million in 2015.
2015 was a strong year for the UK’s Big Six regional cities. Office investment increased 16 per cent to £3.2 billion, which is the highest level since the recession and more than double the eight-year average. Foreign investors seeking standing assets and development opportunities underpinned much of this investment.
Mark Stansfield, senior real estate analyst, CoStar Group, said: “The Big Six regional cities are attracting more and more attention, suggesting that investors have the money to spend and are seeing value outside of Central London. The political will behind the Northern Powerhouse has given the regions an additional shot in the arm as £3.2 billion, a rise of 16 per cent year on year, has been invested in the ‘Big Six’ office market in the last 12 months.”
Foreign investment into the UK totaled a record £27.8 billion in 2015 a six per cent increase on 2014’s £26.2 billion. International capital accounted for 45 per cent of the total volume of transactions, with investment into the UK being spearheaded by the US with a total of £11 billion. Investment into UK commercial real estate from the Middle East dropped dramatically by 62 per cent to £1.6 billion, the lowest level since 2012, largely attributed to the collapse in oil prices and the political uncertainty in the region. In contrast, Far Eastern investment increased by 62 per cent in 2015 to £6.4 billion as investors from Singapore and Hong Kong in particular flocked to the relative safe haven of the UK.
Year
UK
N America
W Europe
Asia
Rest of World
Far East
Middle East
South Asia
2014
38,106
11,942
3,574
9,466
788
3,931
4,299
952
2015
33,929
14,060
4,398
8,142
826
6,382
1,619
97
Richard Yorke, director of market analytics, CoStar Group said: “Despite it being a record year for international capital investing in UK commercial property, we have started to see signs that the market is slowing down. Total investment in the second half of 2015 was down 19 per cent compared to the second half of 2014. With 2016 beginning with severe stock market volatility, heightened worries about China’s economy, falling oil and other commodity prices, and uncertainty about the UK’s place in the European Union, total investment may continue to ebb.”
Demand for alternative assets such as hotels and students accommodation rose strongly in 2015. A sum of £5.5 billion was spent on hotels in 2015, a 47 per cent increase on 2014 making it the strongest year ever. In addition, £4.3 billion was invested in student accommodation, more than double the level invested in 2014 and the strongest year on record. In terms of sector, offices dominated with £29.5 billion spent although this was a five percent drop from 2014. Overall, the three main property types; offices, retail, and industrial all experienced lower volumes, with the proportion of investment going into the retail sector well down on the eight-year average.
The largest deals of 2015 were led by portfolio deals which included Canada Pension Plan Investment Board’s £1.1 billion acquisition of student accommodation run by Liberty Living; Lone Star’s £1 billion purchase of the Project Laser portfolio from Moorfield Group and Apollo Global Asset Management’s £951 million acquisition of LRG’s hotel portfolio.
Noteworthy foreign deals outside of London included Singaporean REIT Mapletree’s £360 million triple-swoop on three prime office buildings in Aberdeen, Bristol and Manchester, AEW Europe’s £325 million purchase of the Bath Road campus in Slough, and Mauritian-based New Frontier Properties’ £189 million acquisition of two shopping centres in Burton upon Trent and Middlesbrough.
On a region by region basis outside London, the South East and North West were the biggest recipients of foreign inflow with £1.4 billion and £0.8 billion invested respectively, with foreign investment in both regions trebling year on year. In terms of overall volumes, the North East experienced the biggest annual increase (32 per cent), with Wales up by 20 per cent. In contrast, investment into Scotland fell by 41 per cent.
Yorke added: “2015 has been a buoyant year for UK commercial property investment. Yields have come in sharply making property increasingly expensive and difficult for investors to find value, especially in London where several key deals fell out of bed in the latter months of 2015 resulting in lower investment levels.
“In addition, the increasing global economic headwinds will likely impact investment, especially that originating from oil and commodity exporting nations. However, as the data shows, the UK still remains a highly attractive place for commercial property investment. Its scale and liquidity is hard to match. Although 2016 is likely to be a more challenging year, our clients report that investors will continue to target new opportunities in the Big Six and other regional cities.”