Deborah Lovell: Still buoyant office space sector, but retail sphere is struggling

Ever since the Brexit starting gun was fired back in June 2016, there has been much speculation surrounding the impact that exiting the European Union will have on business in Scotland. We have explored the impact on various sectors of Scotland’s commercial property market, considering the risks the industry faces and where the opportunities may lie, following our review of recent industry reports and market intel.

Deborah Lovell is a Partner with Anderson Strathern
Deborah Lovell is a Partner with Anderson Strathern

In the immediate aftermath of the 2016 vote, the Financial Times reported there was a ‘sinking’ in the number of commercial property deals across the UK, with London and Scotland hardest hit as properties were withdrawn from the market and deals aborted. Despite this initial market slump, with a matter of days to go until ‘Brexit Day’, market analysis suggests Scotland’s commercial property market was relatively steady in 2018 with deal volumes maintained and increased investment. Indeed, the volume of demand for investment property across the market reached a four-year high last year. It is, however, clear to see that some sectors are performing better than others.

The office space sector is an area that has held up well so far. Historically, demand for Grade A office space has been high in Scotland, particularly in Edinburgh and Glasgow who have produced Grade A office space developments like the Mint Building in Edinburgh and Buchanan Wharf in Glasgow. Although demand for Grade A space suitable for investment is high there are concerns that interest – and values - may drop following Brexit. There have been suggestions that previously overlooked Grade B commercial property might become more attractive post-Brexit, while investors and developers take stock of the economic climate and look for cheaper alternatives to high end Grade A property throughout Scotland.

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In contrast to the buoyant office space sector, market trends show that the retail sector continues to struggle. With reports that busy shopping districts are facing an ‘exodus’ of shops and consumer spending in Scotland remains relatively low, there are real concerns for Scotland’s retail sector. It is unclear, whether this decline is a direct result of the ‘Brexit effect’ or an example of the reported wider impact that changing consumer behaviours and online shopping are having on the high street and the retail sector.

Concerns are that Brexit might just exacerbate an already difficult position. What is clear is that – Brexit or not – the way people shop is changing and the retail sector of Scotland’s commercial property market is feeling the effects.

In contrast, there has been an unprecedented increase in demand for warehousing in Scotland’s property market with industry reports suggesting that current demand for industrial warehouses and storage facilities in Scotland is at ‘fever pitch’. Colliers report that demand for retail warehouses in 2018 in Scotland surged to £330 million, twice the 2017 figure and the largest amount invested in the sector in over a decade.

This recent upsurge in demand for warehousing has, however, exposed a number of challenges facing Scotland’s commercial property market, highlighting a national lack of capacity for warehousing and storage facilities of suitable quality following years of lack of investment in some areas.

It appears that the rise in demand stems in part from manufacturers’ concerns around the supply chain in light of a possible no-deal Brexit, leading to a ‘stockpiling’ of goods where the supply chain is not local. Anderson Strathern’s recent Brexit business survey uncovered that almost two-thirds of Scottish companies are stockpiling or intending to do so. It is one thing to store traditional goods such as building materials but the stockpiling of food has different requirements such as dry storage facilities and chilled, refrigerated or frozen storage facilities. Unfortunately, these specialist food warehouses appear to be in short supply relative to demand.

Property investment Property Company, Ediston has warned that the property market is likely to “pause” after March as investors take stock and access the long-term economic impact of Brexit. Scotland’s commercial property market is extremely resilient and has overcome tough economic adversity many times before but the uncertainty Brexit delivers will no doubt shape its immediate future.

As ever, much will likely depend on the wider political picture and whether a clear timetable for the exit from the European Union can be set and executed effectively .

Deborah Lovell is a partner with Anderson Strathern