Fresh research from Jones Lang LaSalle (JLL) shows that investment deals totalled just £85 million last year, dashing hopes that 2010’s total of £120m would prove to be a low point for the sector, which went into steep decline following the recession.
Although a handful of high-profile deals were closed during the year, the market was hampered by a lack of confidence among investors to back speculative developments, while there was also a decline in demand for new office space as Edinburgh firms preferred to sit tight in their current premises.
Owners of prime assets decided to hold on to their investments, leading to very few quality buildings coming to the market, while appetite for poorer secondary buildings remained weak.
Alasdair Humphery, head of JLL in Scotland, said the performance was “disappointing”, particularly given that there had been hopes of a recovery towards the end of the year.
The 2011 result compares with a pre-recession high of £500m. It is also worse than during 2008 and 2009, when the UK economy was gripped by recession.
Even during the worst of the financial crisis in 2008 and 2009, investments still reached around £351m and £189m respectively.
Humphery said: “The more optimistic amongst us had hoped for stronger signs of recovery by year end. However, 2011 can best be described as disappointing, and this poor economic performance has led to a sober re-assessment of recovery prospects for the UK economy.”
The biggest deal in 2011 was the £23.75m sale in December of the Edinburgh One office building in the capital’s Exchange District – home to Scottish Widows Investment Partnership – which was sold by F&C REIT to German fund Deka Immobilien.
The site next to the Edinburgh International Conference Centre is leased to Scottish Widows until 2021, which according to the seller’s agent Cushman & Wakefield, was key to attracting interest.
Among the other notable deals was the sale of the former Scottish & Newcastle brewery at Fountainbridge to Edinburgh City Council. The site was bought for around £30m by HBOS before the banking crisis, with a view to creating a global headquarters similar in grandeur to RBS’s Gogarburn site. It was sold to the council for what was believed to be a knockdown price in the autumn. The area will become home to Boroughmuir High School.
Humphery warned that 2012 could prove a particularly difficult year for retail landlords as a large proportion of shops come to the end of 25-year leases taken out during the boom of the 1980s.
Figures for the whole of Scotland are yet to be published, but Scottish Property Federation chief executive David Melhuish said commercial property transactions across the country had reached £1.3 billion by the end of the third quarter.
Although this was better than expected, Melhuish said the final figures for 2011 could be “some way” behind 2010’s totals.