Scottish commercial real estate posted an uptick in annual total returns over the third quarter, rising from 2.1% in Q2 to 6.1% in Q3, according to CBRE.
The rise was attributed to improved performance during the quarter, and to the removal from the data of the drop in values prompted by last year’s EU referendum.
Quarterly returns also improved in Q3, with a Scottish all-property total return of 1.7%, compared with 1.4% in Q2 2017.
Steady performance in Scotland’s retail sector resulted in a Q3 annual total return of 5.7%; however, this result has been driven exclusively by income return, with capital value unchanged, on average, over the course of the past 12 months. Rental values are up by 1% over the 12 months, but this has largely been cancelled out by yield shift in the sector.
Weaker office sector
The office sector continues to be the weakest performer over the past 12 months, with a total Q3 return of 4.8%, and rental values down by 2.6%. Quarterly total returns for offices were 1.6%, a marked increase from 0.8% in Q2. Performance in Scotland’s largest cities continued to buck the national trend, with annual total returns reaching 8.9% in Glasgow and 7.4% in Edinburgh.
Industrial is the only sector where the performance gap between Scotland and England has not narrowed, with superior performance in South East England pushing annual UK returns to 16.8%, compared with 6.8% for Scotland. Quarterly returns remain robust, with a total return of 2.2% over the course of Q3, up from 1.8% in Q2.
All markets reported improved annual total returns, with the re-appearance of double-digit returns in the Edinburgh and Glasgow industrial markets at 10.3% and 12% respectively.
The only sector remaining in negative territory was the Aberdeen office market, but at -0.5%, it represented a significant progression from the -4.7% annual return recorded at the end of Q2.
Large transactions
In the investment market, the third quarter saw some of the largest transactions of the year to date. A total of £502m of Scottish stock was purchased, bringing the total investment volumes for the year to £1.31bn, with one quarter to go.
However, overall investment volumes in the first three quarters of 2017 have amounted to just over 50% of the full-year totals in 2015 and 2016 and Scotland will require a strong final quarter to repeat the investment volumes achieved in the previous two years.
Aileen Knox, senior director at CBRE, said: “This is the first full quarter in which the value drop resulting from the EU referendum is not included within the performance data for the previous 12-month period, something which is evident from the notable rise in the annual returns figures.
“It’s reassuring to see this improvement reflected across all sectors and cities, with Aberdeen beginning to show signs of recovery following a weak couple of years.”
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