PROPERTY advisory specialist Lismore is forecasting ‘growing interest’ in prime city centre offices this year.
The business has released its review of the Scottish investment market for the first quarter of 2023, which focuses on the office sector.
With prime yields ‘stabilising’, Lismore is predicting growing interest in particularly well-let regional offices in cities with limited supply, such as Edinburgh.
Colin Finlayson, director of Lismore, said, “Despite limited supply and challenging conditions for new development, strong demand exists for high-quality office space, which creates opportunities for investors to underwrite rental growth. Yield levels are currently comparable to their long-term averages, making them attractive to long-term investors.
“Across Scotland, city centre offices show the greatest occupier demand, with potential for refurbishment/repositioning. To stay relevant in the market, retain existing tenants and achieve rental growth, owners of existing assets must invest in improving their ESG credentials and amenities. These improvements are also necessary to maintain liquidity in the investment market.”
Andy McKinlay, chair of Ediston Real Estate, added, “In the city office markets, supply and demand dynamics are key in order to achieve investor expectations and development success. The market will become more polarised, leading to a more pronounced pricing differential.
“Prime, well-let, new builds with modern occupier-led space and strong sustainability credentials will continue to attract occupiers and trade well. Peripheral buildings can work, but only if repurposed to meet the necessary ESG and wellness credentials, whilst secondary office values need to fall further to reflect post-pandemic demand and capex. Buildings delivered over five years ago are overpriced and lack the necessary ESG credentials.”
According to recent research by Lismore, 56% of investors do not anticipate an increase in transaction volumes in the prime office sector during 2023. However, investment managers are more positive, with 56% expecting volumes to increase. However, there are concerns about the quantity and quality of stock being brought to market and the gap between vendor and buyer pricing aspirations.
83% of respondents said they do not believe that values have fallen sufficiently for added value office space, and they need to see further reductions before revising the sector.
56% of respondents expect hybrid working to remain, while 37% expect an increase in the move to work from home, at least for part of the week, over the next year. Lismore revealed that businesses are reacting by consolidating their office footprints while providing ‘substantially improved’ office environments.
Across Scotland, office markets in each of the three major cities are distinct in terms of occupational demand drivers and investor sentiment.
Lismore said Edinburgh is benefiting from a broad base of occupier demand, with financial and professional services particularly active currently. This is against a background of low supply, resulting in rental growth. Vacancy rates are low across all grades, which may defer the refurbishment of some buildings which are becoming obsolete, as owners are able to maintain income in a market with low supply.
In the west, Lismore explained that Glasgow has traditionally been more reliant on the public sector and corporate occupiers, and both sectors are currently quite inactive on new acquisitions while they work out longer-term space needs. One area of the market that is letting quickly though, is where landlords are offering more flexible and Cat B-fitted options. Lismore expects to see more landlords adopting that strategy as a drive to fill vacant space.
At an occupational level, Aberdeen is showing ‘genuine signs of improvement’. Headline supply levels remain ‘stubbornly high’, however a reasonable proportion of the total supply is ‘effectively obsolete and requires re-positioning or demolition’ Lismore added. Good quality stock is gathering letting momentum.
