Still grounds for cautious optimism in commercial property - Euan Kelly

After a busy first half of the year in the commercial property market, the typical summer hiatus has come around as many people enjoy the first real opportunity in two or so years to take a break and travel abroad. And, by many accounts, the annual pause for breath could last longer than normal.

That was demonstrated by RICS’s recent edition of its Commercial Property Survey, which found respondents in Scotland said a net balance of +17 per cent of respondents reported a rise in investment enquiries during the second quarter of 2022, compared to +29 per cent in the first. Across the UK, 43 per cent of those surveyed said they feel the market is entering a downturn.

Much of this has been born out of concerns about the global economy and rising interest rates from private equity investors, primarily from the US, which have been the driving force behind investment into various sectors. This has spread throughout the market, with UK commercial property investment volumes reportedly falling to just £2.2 billion – down from a monthly record of £9bn the month before.

Still, our own research showed that investment volumes into Scottish commercial property reached their highest since 2018, with £1.2bn of deals between January and June this year – a 54 per cent increase on the same period last year and 21 per cent above the five-year average.

Euan Kelly, capital markets partner at Knight Frank Edinburgh

It is also noteworthy that potentially Scotland’s largest ever office deal took place this year, with the sale of HFD Group’s 177 Bothwell Street to Pontegadea. Even in previously troubled sectors there have been signs of a resurgence. Investment in retail assets increased by more than 55 per cent on 2021, rising from £148 million to £230m.

Whilst the increase in interest rates is having an effect on debt-backed buyers, we are also witnessing private cash buyers and high-net-worth individuals seeing opportunities to be competitive. We were recently selling a prime retail asset with an asking price of over £14.5m and received multiple offers from cash purchasers – the remaining ‘dry powder’ still needs to find a home.

On top of that, occupational markets are still very strong in Scotland’s central belt. In Edinburgh, for example, there is only 400,000 sq ft of new build and refurbished space coming on to the market over the next two years, with nearly 750,000 sq ft of active requirements reported at the end of Q2 2022 and all new space pre-let.

These are positive signs for what has, for the most part, been a very uncertain period – between the war in Ukraine, high inflation, political upheaval, a stock market downturn, and rising interest rates. While all of these factors may have caused a pause for thought, the capital is still there and more money continues to be raised.

There is a feeling that investing now might require a dose of courage, but if you take the longer term view there are grounds for cautious optimism. Purchasers may be choosing to be more selective, but, with the weight of money raised, much of it will need to be spent by the end of the year.

Euan Kelly, capital markets partner at Knight Frank Edinburgh