Investors have ‘insatiable appetite’ for Edinburgh hotels but other sectors mixed - new research

Hotels have emerged as Scotland’s top performing area of property investment as the overall market “pauses for thought” amid geopolitical tensions and a changing policy backdrop, according to new research.

Knight Frank’s latest study reveals that Scotland’s commercial property market attracted some £750 million of investment in the first half of 2025.

The total is down by a fifth on the £925m average for the previous five years, but broadly in line with the trend seen across the UK. That figure includes a particularly strong year in 2022, which if discounted, produces an average of £769m, much closer to the 2025 first-half result.

The recent sale of the W Hotel at Edinburgh’s St James Quarter was hailed as a landmark transaction. Picture: Jane Barlow

The commercial property consultancy’s analysis is based on data from Real Capital Analytics (RCA).

Hotels were found to be the top-performing asset class, with £213m of investment. That was the second highest figure for the sector during the first six months of the year since 2020, behind only 2024’s £235m. Retail was second with £207m-worth of transactions, followed by offices at £152m.

Private investors were the most active buyers during the first half of the year, accounting for 40 per cent of investment - the highest share for the six-month period in recent years. International investors were second with 32 per cent of the total. Institutions accounted for 19 per cent, while real estate investment trusts (REITs), listed property companies and occupiers made up the remaining 9 per cent.

Alasdair Steele, head of Scotland commercial at Knight Frank, said “a lot had happened” in the first six months of 2025, both internationally and closer to home.

The St Enoch Shopping Centre in Glasgow also changed hands in a property investment deal.

“The changing geopolitical backdrop has given overseas investors pause for thought,” he noted, “while the Housing (Scotland) Bill’s journey through the Scottish Parliament will be a big influence on appetite for deals in areas like build-to-rent and student accommodation.”

“Nonetheless, Scotland has shown an encouraging level of resilience, with investment holding up well despite the level of uncertainty. That is partly a reflection of the deeper buyer pool, with private investors active while other groups have been quieter than usual.

“At the same time, hotels are emerging as the standout property type, supported by a seemingly insatiable appetite for Edinburgh, in particular,” Steele added. “With more hotel stock coming online in the city over the next year or so, we could see the strong levels of investment in the sector continue.

“All things being equal, we expect to see a pick up in deal activity during the second half of the year. In a volatile world, commercial property remains an attractive option for investors - and Scotland remains good value within the UK, which itself is widely seen as a safe haven from an international perspective.”

The Knight Frank report coincides with new research from Lismore Real Estate Advisors and its latest review of the Scottish investment market, covering the second quarter of 2025.

The firm said transaction volumes between April and June appeared “relatively healthy” at £296m, representing an increase of 9 per cent, compared to the same period last year. However, it noted that two transactions accounted for 48 per cent of total market activity in the latest quarter, with volumes 21 per cent below the five-year average - broadly in line with Knight Frank’s findings for the first half.

Stripping out landmark transactions, such as Nuveen’s £100m sale of the W Hotel at Edinburgh’s St James Quarter to Schroders, and Sovereign Centros’ £54.4m disposal of St Enoch Shopping Centre in Glasgow to Praxis, total investment volumes were actually down on the same period last year, underlining what has been another “muted” quarter for the market, Lismore added.

Chrissie Clancy, an investment surveyor at the property advisor, said Edinburgh’s hotel market was continuing to “outperform”, buoyed by strong tourism and business travel.

The city’s high occupancy and double-digit growth in revenues per available room, or RevPAR, a key industry measure, are said to be driving investor appetite for “increasingly scarce redevelopment opportunities”.

Clancy added: “The high street retail sector is also regaining momentum. Elsewhere, the market is showing early signs of renewed activity, with Glasgow offices seeing increased interest and several deals under offer.”

Lismore said that in a landscape defined by “economic uncertainty and shifting investor sentiment”, consistency had become a “prized commodity” with Scotland’s logistics sector highlighted as a standout example. It noted that logistics has emerged as a “rare constant”, driven by strong occupational demand, critically low supply and renewed investor appetite.

Logistics

The firm’s quarterly investor research indicates that sentiment towards Scotland’s logistics sector remains broadly optimistic. More than half of respondents (56 per cent) expect to be net buyers in the second half of 2025, with just 10 per cent anticipating they will be net sellers.

Valentine Beresford, investment director at LondonMetric, said: “Logistics continues to be our preferred sector, driven by strong demand and chronic supply constraints. While rising debt costs and limited stock present challenges, they’re market-wide, not sector-specific. The biggest issue now is the lack of investable opportunities, with strong competition when assets do come to market.”

Clancy added: “The UK macroeconomic outlook offers cautious optimism. With inflation softening and interest rate cuts likely in the second half, investor sentiment may begin to turn a corner. With a number of significant deals expected to conclude in the months ahead, we anticipate a meaningful uplift in activity during the second half of 2025.”

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