Commercial property investment: 'Grounds for selective optimism' as 2022 sees volumes gather momentum

Scotland’s commercial property market saw investment volumes continue to recover in 2022, despite macro-economic challenges, new analysis has revealed.

Property consultancy Knight Frank found that deals worth a collective £1.66 billion concluded last year, marginally up on the £1.64bn recorded during 2021, and the highest since 2019’s £2.02bn. Overseas investors continued to account for the majority of deal activity, with a 52 per cent share of investment volumes during 2022.

The purchase of 177 Bothwell Street in Glasgow by Spanish investment house Pontegadea was a record office transaction in Scotland, at more than £200 million. Property companies were by far the second most active buyers, according to the new study, representing 35 per cent of last year’s deals.

Nearly £500m of offices were traded, followed by industrials, alternatives and retail, which accounted for around £300m each. Glasgow saw the highest investment volumes of Scotland’s three largest cities at £468.54m. Aberdeen saw £143.06m worth of deals – the highest amount since 2019, when there were transactions totalling £204.24m.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “Investors have had a lot to contend with this year, between the conflict in Ukraine, rampant inflation, interest rates rising, bond and stock market volatility, and political developments. Yet, despite all of that, Scotland’s commercial property market has continued its upward trajectory from the lows of the initial outbreak of the Covid-19 pandemic nearly three years ago.

“There are always going to be challenges on the horizon, but after a particularly difficult period there are grounds for selective optimism for the year ahead. The cost of debt appears to be easing and there is still a deep pool of buyers looking at Scotland, and the wider UK, to invest. Aberdeen has been buoyed by the sustained high oil price, while the deal for 177 Bothwell Street underlines Glasgow’s attractiveness. Meanwhile, Edinburgh’s occupier market dynamics continue to bolster interest in the city.”

He added: “Yields in Scotland remain more attractive than many other parts of the UK and continental Europe, giving it an advantage. Liquidity issues are still a challenge for some funds, which will likely mean assets that are typically not on the market may become available for those in a position to buy. Similarly, cash purchasers are in a very strong position going into 2023.”

Last month, property adviser CBRE said commercial property investment markets were expected to see “green shoots of recovery” by the end of 2023. Following a period of uncertainty, pricing is likely to stabilise towards the end of this year, with a “continued flight to quality” being a key driver of activity across all asset classes, according to the firm’s UK market outlook.

Knight Frank said Edinburgh’s occupier market dynamics continue to bolster interest in the city.

In the near term, a “moderate” recession is anticipated, with high inflation and rising interest rates putting downward pressure on economic activity. Income returns, rather than capital growth, will likely underpin commercial property investment in 2023, the report noted, heightening the importance of asset management and the financial performance of occupiers. In the office market, leasing activity is forecast to be constrained due to a fall in office-based employment, post-pandemic.