International investors dominate Edinburgh’s office market

Sound investment levels in 2016 despite ongoing national and international political uncertainty

International investment, as a proportion of total investment, in Edinburgh’s office market increased significantly in 2016, with more than 90% of purchases accounted for by overseas investors, according to new research from property firm JLL.
While the Capital’s total office investment volumes dipped from nearly £400 million in 2015 to £355 million in 2016, the percentage of overseas buyers increased significantly from 62% to 93% for the same period.
Overseas investment in Edinburgh has been growing steadily in recent years according to JLL, which recorded a 50% split between domestic and foreign money in 2014, before the overseas figure grew to 63% in 2015 and over 90% in 2016.
Year
Total Office Investment Volume
Volume Overseas Purchasers
Percentage of overseas volume
2013
£314,110,000
£174,236,817
55.47%
2014
£221,445,000
£111,563,991
50.38%
2015
£397,048,905
£247,718,812
62.39%
2016
£354,950,000
£330,950,000
93.24%
According to Chris Macfarlane, lead director in Capital Markets at JLL Scotland, the changing profile of property investor in Edinburgh is due to a number of factors: “We expect to continue seeing overseas buyers outstripping domestic funds as we move forward. However, the proportion of overseas investment recorded in 2016 could be the highest on record for quite some time given the unique cocktail of triggers which impacted on the market in 2016.”
UK Institutional caution
Macfarlane said: “Setting aside a general easing in weight of money, the continuing uncertain political landscape is causing UK Institutional Funds to go “Scotland – light”.  There is no wholesale selling but Funds are reticent to be over exposed to Scotland in terms of their overall portfolio weightings.”
Discounted Pricing
“In comparison to some of the UK’s other strong regional markets such as Manchester and Birmingham, pricing has been discounted in Scotland typically between 25 – 50 bps. A trend not lost on those canny investors trying to find some extra margin of value.”
Global movement of Capital
“Influences such as political instability in the Middle East, Russian posturing and the prospect of President Elect – Trump are all adding to the flow of capital coming from these regions/countries trying to find more stable markets such as the UK.
“London has become increasingly expensive – hence the larger regional markets in the UK including Edinburgh and Glasgow have looked like offering better value.  This is particularly so for more mature/sophisticated investors (e.g. North American Private Equity and German Institutions) who are very au-fait with the regional markets.”
Impact of Brexit
“The immediate impact of the Referendum outcome, resulting in the de-valuation of Sterling, has generally made the UK look like better value, as those investors trading in the Euro / Dollar see a positive currency play.
“However, with so much uncertainty on the horizon, the natural investor reaction is a flight to prime and the stronger markets. Edinburgh, in particular, as a European Capital City with a broad occupier base, a growing workforce and very strong tourist spend is being perceived by investors as an attractive long term bet, whatever shape “Europe” might take in the future.”
Year
Total Office Investment Volume
Volume Overseas Purchasers
Percentage of overseas volume
2013
£314,110,000
£174,236,817
55.47%
2014
£221,445,000
£111,563,991
50.38%
2015
£397,048,905
£247,718,812
62.39%
2016
£354,950,000
£330,950,000
93.24%