Office sales slump in capital over fears of financial services exodus

A report on office sales in the capital by property firm Jones Lang LaSalle (JLL) shows that transactions totalled 120 million in 2010, compared to a peak of 500m in 2006.

This is a stark contrast to other UK markets, which witnessed considerable recovery in transactions volumes last year from a nadir in 2009.

JLL said London's West End saw a growth in volume from 2.8 billion in 2009 up to an estimated 5.2bn in 2010. Similarly, London's City market office grew from 3.5bn in 2009 to approximately 5bn in 2010.

Alasdair Humphery, managing director for JLL in Scotland, said sellers expecting too high a price were a culprit in the poorly performing market but that investors were also terrified of an exodus of office occupiers in the financial services sector, especially banks.

Humphery said: "Investors here are hit with lots of headlines about Edinburgh and banking and financial services.

"There is a hesitation there, a risk factor that is hard for them to get their heads around."

He added: "We have a different view. We think there are quite a lot of good news stories about Edinburgh that don't get the perspective they should have.

"But investors are nervous beasts and are cautious about preserving capital looking for growth in the short term.

"Certainly last year it has been hard to see that from an Edinburgh point of view."

But he said he expected to see an "improving story" in the capital in 2011, driven by the dearth of new offices. He added that no new buildings were set to be completed in Edinburgh during the next two years when the investment market was set to pick up.

"The reality of the development market is there is virtually nothing coming out of the ground," said Humphery.

"London is where the money is going and that might make it expensive. In which case regions will be on the agenda again. But it has been a tough old year."

Humphery said about 200m worth of office building transactions fell through last year in Edinburgh, noting that if these had come off it would have brought the value of offices sold back up to average levels.

These included EHQ at the Gyle, after Tesco Bank pulled its plans to sell the building in a quick sale and leaseback deal for 32m. The retailer acquired the site from Sir David Murray's PPG Group for an estimated 15m.

Humphery said the biggest deal to fall through was the 64m sale of New Uberior House, which is occupied by Lloyds Banking Group but owned by German property fund Invesco.

The Duke of Buccleuch's building at Shawfair Park, occupied by the Scottish Qualifications Authority, also failed to sell.

Humphery said 2010 should be the bottom of the cycle in Edinburgh, but the highs seen in 2006 "probably won't come back".

He added: "They were fuelled with debt and now debt is there only in small measures."