Property investors to pause for breath after pre-summer flurry in Edinburgh and Glasgow

Scotland’s property investment market saw a pre-summer flurry of activity but now faces “growing headwinds”, a new report has warned.

Following a strong start to the year, the second quarter continued the momentum with transactional trading of about £612 million, more than double that seen in the equivalent period in 2021, according to the latest quarterly review by Lismore Real Estate Advisors.

Activity for the past quarter was 56 per cent above the five-year average, although that figure is skewed by the pandemic. Excluding 2020, the Q2 2022 figure is 27 per cent above the average.

The report pointed to the standout deal of the quarter being HFD Property Group’s £215m sale of 177 Bothwell Street, Glasgow to Pontegadea - one of the biggest regional office deals ever concluded.

Other key transactions included the £30.2m sale of a Premier Inn on Sauchiehall Street, Glasgow, the £16m sale of 123-129 Buchanan Street, Glasgow and the sale of 124-125 Princes Street, Edinburgh for £15.8m.

A number of “significant” deals are due to complete early in the third quarter before what could be a quiet summer as investors take stock of the macroeconomic environment, Lismore noted.

Pricing is likely to come under pressure on “assets which are not absolutely prime”, the review warns.

Lismore director Colin Finlayson said: “Cash remains king, as the increasing cost of capital for debt backed investors is creating an advantage to cash investors - if they can move quickly then opportunities will arise in the second half of the year.

The latest Lismore report highlighted the sale of 177 Bothwell Street, Glasgow as a standout deal of the quarter.

“There remains a persistent strong demand for purpose built student accommodation (PBSA) from sector specialists and funds, which is driving pricing. The Scottish build to rent (BTR) market continues apace in Glasgow and Edinburgh although build cost inflation is keeping the supply pipeline in check.

“Aberdeen could see resurgence and be one of the winners over the next six months, with investors seeking out higher yielding stock to balance their portfolios.

“After a strong Q1, caution in the market has been driven by the war in Ukraine, rising inflation and more challenging debt conditions, causing investors to pause for breath.”

Lismore’s research on the office market shows that 61 per cent of investors expect yields to soften over the next six months and it was noted that prime London yields have already begun to soften, with the regions traditionally lagging behind.

Funds and investment managers were the most pessimistic with 100 per cent of funds and 63 per cent of investment managers anticipating yields cooling in the remainder of 2022.

Finlayson added: “Now the pandemic is behind us, and weekly occupancy rates are steadily increasing, investors are focused on what are short-term trends and what look to be long-term. These will influence their market focus and stock selection in the sector..

“In the two main Scottish cities of Edinburgh and Glasgow, we’ve seen resilient demand over the last two years, and some significant increases in prime headline rents. This is predominantly in the city centre and newly developed/refurbished buildings. However, the development pipeline in both cities is extremely limited.”