Scottish property investment market to cool after bumper first half

Investment volumes in the first six months of this year were the strongest they have been since 2018 as the market continued its recovery from the pandemic, according to new analysis from property advisor Knight Frank.

The firm found that £1.2 billion of commercial property deals were agreed between January and June 2022, up 54 per cent on the same period last year. The figure is also 21 per cent ahead of the five-year average - albeit, this was skewed by low investment volumes during 2020 and, to a lesser degree, 2021, amid the economic fallout from the pandemic.

Overseas investors represented more than two-thirds (68 per cent) of the total investment figure, equivalent to £843 million, with UK property companies the second most active buyers, totalling £296m or 23.9 per cent of overall investment volumes.

Investment in retail assets increased by more than 55 per cent on 2021, rising from £148m to £230m, with retail warehousing accounting for £165m of the total figure. Offices were the most popular asset class with £410m-worth of deals, boosted by the sale of HFD Group’s vast 177 Bothwell Street development in Glasgow, in what is believed to be a record transaction for Scotland.

Edinburgh saw £400m of investment, while Glasgow accounted for £329m,a breakdown of the latest data shows. Deal activity in Aberdeen continued to pick up, reaching £189m, largely from the sale of two retail warehousing assets.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “The first half of the year has underlined a couple of key trends that have emerged over the last two years: retail warehousing and industrials remain in high demand, while prime offices are highly sought after - underlined by the deal for 177 Bothwell Street.

“Similarly, overseas investors accounting for such a high share of investment during the last six months also highlights the strength and depth of the buyer pool for Scottish commercial property.”

Edinburgh saw £400m of investment in the first half of 2022, according to the latest research by Knight Frank.

He added: “An uncertain macroeconomic outlook will likely cool deal activity over the next couple of months. However, commercial property has typically acted as a hedge against inflation for investors and, with yields in Scotland’s main cities comparatively good value and supported by strong occupier markets, we expect interest to remain strong in the second half of the year.”

The Knight Frank report echoes the findings of the latest quarterly review by Lismore Real Estate Advisors, released earlier this month.

It found that the property investment market saw a pre-summer flurry of activity but now faces “growing headwinds”.

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.

“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.”