Viewpoint - 29/07/2011

Glasgow: Real potential for rental growth

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It was with great expectation the property market entered 2010. After a strong return to market at the end of 2009, there was a belief that the worst of the property crash was behind us and with strong demand chasing limited stock, prices began to rise. Did it last? Bill Binnie, from our investment team in Scotland explains.

The flood of activity was short-lived. Concern grew over the prospects for a UK economic recovery which was not helped by an impending general election in March, with the prospects of a hung parliament, and the encouraging activity in the first quarter of 2010 evaporated.

In Glasgow, there was significant investment in the first quarter, which totalled over £147m of acquisitions. These included two acquisitions by SWIP at 145 St. Vincent Street (£11.7m, 6.5% initial) and 107 West Regent Street (£7.3m, 6.78% initial) and acquisition of 50 Bothwell Street (£29m and 6.75%) by PRUPIM.

Investment levels slowed to a standstill by Q3 2010

However, with economic uncertainty coupled with a lack of quality investment stock, investment activity slowed to a virtual standstill over the summer months. Whilst the Glasgow occupational market seemed extremely resilient to the economic downturn, investors turned their focus to London, and the belief that with revised confidence in the financial sectors, it alone offered potential for rental growth.

Investment focused on buildings offering long term secure income

In Glasgow demand from institutions was restricted to buildings offering long secure income. It was reflected in Aviva’s acquisition of Exchange House in George Street for £30m, which was let on a long lease to Glasgow City Council and the funding of their pre-let development in College Lands by Standard Life (£52m). Overseas investors were also active in Glasgow, but only for long leases with Union Investments RE purchase of Equinox House in Cadogan Street for £28.4m.

However, where properties were not offering long leases, demand was limited. With banks already over exposed to the UK commercial property market, they were unwilling to provide debt finance on anything but the most secure stock. Where leases had an unexpired term of less than 10 years, buyers were hard to find.

One of the most significant sales in the latter part of 2010 was Moorfield’s acquisition of Skypark for £53.75m. With the owners and their debt provider keen to deleverage, this once jewel in the crown was sold reflecting a net initial yield of over 10%, significantly in excess of the 6.6% paid when acquired in 2005.

Opportunities for owner-occupiers opening up

The lack of traditional buyers and a resulting fall in prices, created opportunities for owner-occupiers. They could now acquire prime grade A office space at significantly reduced capital rates per sq ft. Both the National Farmers Union (NFU) and Scottish Southern Energy (SSE) acquired prestigious city centre offices. NFU purchased Clarion House (now known as Centenary House) from Royal Bam for £26m (£346 per sq ft) and SSE acquired One Waterloo Street for £19m (£322 per sq ft).

These acquisitions further reduced the available stock within Glasgow’s Central Business District. With no speculative office development currently under way, coupled with continued strong occupational demand, we foresee reduced levels of incentives being offered to incoming tenants, and headline rents to rise. The city offers real prospects of demand outstripping supply as the country emerges from the recession in 2012/2013, and therefore offers strong prospects for future rental growth.

Overseas investors pushing prices up

Whilst the focus for investors remains fixed on London and the South East, the weight of demand from both UK funds and overseas investors is pushing prices up and initial yields, down below 5%. Quality stock, let on long leases in Glasgow, offers better value to investors, with real potential for rental growth. With rents rising in London, this will make provincial centres such as Glasgow an attractive relocation alternative to both national and international occupiers, further enhancing the prospects for growth.

Stock selection will be key with the best buildings providing the best opportunities, even if leases are not over 10 years.

Future outlook of medium term growth

Looking forward, we predict that a lack of future developments against continued tenant demand in a recovering UK economy will provide strong potential for medium term growth. Limited grade A stock will result in prime prices being paid for the best buildings and Glasgow will provide attractive returns for investors over the medium term when compared with London and the South East 


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