Re-pricing of prime properties drives Edinburgh market

Nick Penny, Investment Director at Savills, said: "Whilst investor activity has remained muted, the beginning of 2009 saw augmented investor interest, which is a reflection of the improving yield gap and the correction in pricing of prime office properties. We expect this appeal to continue throughout the year, particularly for equity rich investors looking for the opportunity to acquire secure income at knock-down prices.

"In addition, we predict that yields will stabilise on smaller secure income deals in the city over the next 12 months."

With regard to the Edinburgh office leasing market, the report states that take-up in the city remained resilient in 2008 reaching a total of 661,000 sq ft (61,409 sq m), which sits just below the long-term average of 690,000 sq ft (64,101 sq m).

Keith Dobson, Office Agency Director at Savills, said: "The main reason that Edinburgh’s office take-up during 2008 was so durable was its position not just as a financial centre, but also as the administrative centre of Scotland. While the proportion of space taken by the banking sector was down on previous years, this was compensated by strong demand from the insurance and financial services sector as well as the business and consumer services sector and the professions."

Following a decade of limited availability of new stock in Edinburgh’s city core, Savills research shows that 2008 saw an increase in the amount of office space on the market with year end availability rising marginally from 2.2 million sq ft (204,380 sq m) to 2.5 million sq ft (232,250 sq m). However, the report also confirms that, aside from the 200,000 sq ft (18,580 sq m) of new space currently available at Waverley Gate, the bulk of vacant grade A space remains outside the city’s centre. In addition, the development pipeline remains restrained with just 400,000 sq ft (37,160 sq m) of prime core grade A stock due for completion in 2009.

Looking forward, the report suggests that the major issue will be tenant returns to the market and the impact that this will have on the vacancy rate and subsequently achievable rents.

The report also predicts that total availability will rise in 2009 and peak at 2.8 million sq ft (260,120 sq m) in 2010 before falling sharply as a result of the low levels of development completions. Take-up is expected to return to average levels by 2011, but remain below average in 2009 and 2010. This will result in a dragging effect on headline rents until 2010 when the report forecasts that rents will stabilise before starting to recover in 2010/11 following a shortage of grade A office space.

Dobson said: "Aside from the public sector, the two major Scottish banks are the largest employers in and around Edinburgh and, as such, any future predictions are dependent on the rate of their recovery. However, the rental fall should be limited by the state of the development pipeline."

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