Quarterly returns for Scottish commercial real estate fell to 1.2% in the first quarter of the year, down from 2.0% in the previous quarter. This is a continuing trend over recent months with slightly lower returns posted quarter-on-quarter since the peak in 2014.
The lower return of Q1 in particular is largely due to a small fall in capital values over the course of the three month period, with All Property Scottish capital values decreasing by -0.2%, a shift from +0.6% in Q4 2015.
Industrial was by far the most resilient sector with a return of 2.2%, just slightly lower than the Q4 2015 figure. Industrial total returns outperformed both other sectors in Q1 2016 for the tenth quarter in succession.
The relative underperformance of the office sector, with returns in the first quarter falling to 1.1% from the 2.3% achieved in Q4 2015, can be attributed to net falls in both capital and rental value, both of which were -0.3% for Q1.
Total returns for Scottish retail fell back to 1.1% in Q1 from 1.7% in the final quarter of 2015. This was entirely due to a slowing and reversal in the pace of capital growth with values falling by 0.3% during the quarter having previously been bolstered by 0.4% in Q4 last year. Rental growth, at 0.2%, remains unchanged from the previous quarter. Within the subsectors, retail warehouse was the strongest performer with capital values slipping by just -0.1% compared to -0.3% for standard shops and rental growing by 0.5% against zero growth for standard shops.
On a city level, the hierarchy remains largely unchanged from the previous quarter. The central belt remains the best location for commercial real estate in Scotland, with Glasgow and Edinburgh’s office and industrial markets the strongest performers in the twelve months to the end of Q1 2016.
The industrial sector performance across all three cities was either in line with or outperforming the All Scotland total return.
In Aberdeen, offices remain the weakest in performance terms. However, the pace at which returns have been declining has now slowed.
The first quarter has been dominated by an active few months for investment activity, particularly in the office market with a number of large lot acquisitions in Edinburgh, including DEKA’s acquisition of Atria for £105.25m and TRIUVA’s purchase of Quartermile 4 for £68m.
Aileen Knox, senior director at CBRE, said: “There are no great surprises within the statistics for Q1 2016, with the overall Scottish economy increasing by just 0.2% in the final quarter of 2015, characterising a year of weaker economic growth for Scotland.
“Retail showed the most varied performance and it was interesting to note the disparity amongst the subsectors, with Scotland’s high street shops underperforming relative to the UK while retail warehouses outperformed.
“While there was a notable fall in returns for the offices sector, it remains to be seen whether or not this was a one off, shorter term blip, perhaps related to the softer market conditions associated with the forthcoming EU referendum.”