Rising recovery

As supplies of prime space start to dwindle, Estates Review outlines that the Scottish office market is in line to receive an unexpected boost in the coming months

The story of new development grinding to a halt has been symptomatic of the downturn across the UK for some time now. And while some areas of the country are getting to a position where new development is again becoming an option, Scotland is not on the whole one of them.

Now a report by Jones Lang LaSalle (JLL) entitled UK Office Market Conditions, suggests that the lack of development could prove a positive for Scotland's commercial property market. Indeed, JLL estimate that the lack of development will help current office rents and values as demand outstrips supply occurs.

JLL's predictions are based on the current situation of the office market in Edinburgh and Glasgow, where there are no short or medium-term office developments being planned. Indeed, at present it is expected that no new developments will get underway until 2013. With the current movement of property in these cities, the stock of Grade A space could even run out.

“As there are no developments on site in the city core, there will be no new large developments completing before mid 2012 at the earliest,” says Cameron Stott, the director of JLL in Edinburgh. “Even if take-up continues at the current low level, supply will reduce and we are forecasting potential shortages of Grade A space by 2012 if not before” he said.

In Glasgow, the fears of constricted supply have already spurred businesses into action. Ernst and Young have begun pursuing a space 30,000 sq ft in the city before compression in market availability takes too great a hold, and currently have an interest in both HF Developments’ 1 George Square and the Capella building at 5 Atlantic Quay. Other companies also equally expressed their interest in both cities.

Contrary to popular belief, the Scottish office market has in fact been in a state of recovery since midway through 2009. Yet as the rise in property values failing to negate the initial falls of the downturn, and with rental values in decline for most of that year, the current situation of reducing office space was not clearly apparent.

The recent change in interest in the Scottish office market has come as somewhat of a surprise - and a relief. For it is the sign that recovery is finally taking hold. For others, it will be good news for their existing developments that have weathered the recession.

One project set to benefit from the demand for space is the new Maxim Business Park. Located around 30 minutes drive from Glasgow, construction of the park was continued during the downturn. The first phase of the business park has now opened and received its first client in Currie & Brown, who have taken 15,000 sq ft at a price of £17 per sq ft. With large spaces on offer, with individual floors of up to 187,000 sq ft, Maxim will likely attract more companies wanting prime space near to Scotland’s largest city.

Much like the rest of the UK market however, the market in Glasgow and Edinburgh is still divided and it is currently only the Grade A office space that is of interest. While those holding Grade B space are increasingly keen to renovate, Alasdair Humphery, managing director at JLL in Scotland, outlines that its still all about the top-quality space: “Investor focus remains firmly on prime, well-let stock, with continued caution surrounding assets with potential voids or letting risk in the short and medium term, given the weak occupational markets,” he said.

As the supply of prime space dwindles however, this situation may well change. Though Mr Humphery believes it will only be the "braver fund managers" taking on the risk of Grade B, if supply issues continue this will prove the logical - and only - direction for buyers. Watch this space.