Capital's office market growth bucks trend

DEMAND from financial firms and the public sector saw the Edinburgh office market buck wider UK trends last year to record 24 per cent growth, according to a report out today.

But despite last year's recovery, property agents remain anxious about the market's prospects this year as public sector requirement for office space has "all but evaporated".

Just under 450,000 sq ft was let in the centre of Edinburgh last year, according to research from Colliers International - a marked improvement on 2009 and better than many other UK cities outside of London.

Lettings to the banking and financial sector almost doubled compared to 2009 but the NHS's deal to rent 37,000 sq ft of space at Waverley Gate saw the public sector account for the highest proportion of last year's take-up.

Guy Grantham, director of research and forecasting at Colliers International, said the improvement in the Edinburgh market was in contrast to a challenging environment elsewhere in the UK.

But with public sector demand set to go into decline for the next two years at least, there are fears Edinburgh's city centre will continue to be dogged by oversupply.

"Scotland's exposure to public sector employment is considerable with public services accounting for 23 per cent of GVA (gross value added] on an annual basis," he said. "This is the fourth highest percentage of all the UK regions, hence any reduction in employment and output from the public sector is likely to have a significant impact upon the overall Scottish economy. Public sector demand for property has all but evaporated in Scotland's key commercial centres."

More than 300,000 sq ft of space remains available in the city, with a number of recent developments, including the Quartermile, Tanfield - the former Standard Life building in Inverleith - and the Cube all still offering space. The report also sounds a note of caution over the financial and banking sector.

Patrick Hannay, head of of-fices in Edinburgh at Colliers International, said the capital will remain a tenants' market this year, with many developers and office owners continuing to offer significant incentives.

"There will be no speculative office completions within the city centre this year and only H1 completing at the end of 2011. However, there is still a large amount of space available and it is very much a tenants' market."

Meanwhile concerns are growing over the investment market as the introduction of Basel III rules, requiring banks to hold greater capital, from next year is expected to hit foreign lenders, particularly those German banks that kept the market afloat following the recession.