Retail property has been trailing, but the industrial sector will continue to help underpin returns as warehouses, prime offices and life science/pharma assets remain in demand.
The American owned international property agents, Colliers International, predict that all UK market sectors will show positive total returns growth in 2022, with the leading sector industrial property in the vanguard at 13.2%.
Overall, yields are well below the 16.5% total rental growth seen in the six-year high figure in 2021, but yields will stabilise and values will recover following a very difficult period.
Douglas McPhail, head of Colliers in Scotland, has said:
“We continue to see considerable investor demand for offices in Scotland, especially in Edinburgh where we have witnessed strong prices being paid.
“Looking across the commercial property spectrum, pricing remains firm with yield compression expected across most market sectors this year.
“We are also expecting investment volumes to break through the £2 billion mark in 2022 as appetite remains strong and there are still opportunities for strong returns.”
Investment in Scotland encouraging
The firm reports retail investment sales in Scotland hitting a three-year high of £530 million in 2021, helped by a strong final quarter which saw £210m transacted.
Tourism volumes are expected to return slowly as Covid recedes, with an expected return to near normal levels by the summer, which should help support high street shopping.
However, following price hikes due to rising inflation and the war sanctions these will have a real impact in real household incomes. The result will be declining consumer confidence which will inevitably continue to put pressure on retailers. Colliers is expecting yet more rent reductions across most UK retail centres over the next two years, with as return to growth in 2024.
Despite the significant rental declines through the pandemic period, Colliers predicts that the pricing correction is coming to an end. Mr McPhail says that, “All retail yields in Scotland hardened in 2021 and at the end of the year were at 6.98%, down by just 0.84% since the end of 2020.”
Retail warehouses are expected to perform particularly well, with Scottish office buildings holding their own at just 5% below the 10 year average of £680m. Investor demand for prime assets remains strong which will result in steady asset price rises expected this year.
Glasgow, Edinburgh and Aberdeen have all seen record take-up levels of leases, with a potential resurgence in the oil business making Aberdeen one of the front runners for North Sea oil companies. Shell recently took 71,000 sq ft at the Silver Fin Building earlier in 2021.
Colliers figures show that around £340m accounts for transactions completed in the industrial sector in 2021. This is a big increase from the £220m transactions in 2020, and almost 50% above the 10-year average of £230m.
Elliot Cassels, in the National Capital Markets team at Colliers Scotland, had said:
“The rise in e-commerce and the effects of COVID-19 has accelerated the structural change in demand for warehousing. The increased tenant demand and strong rental growth has resulted in industrial and distribution remaining the best performing sector in the Scottish property market and the rest of the UK attracting strong investor demand from both domestic and overseas capital. However, the Scottish market has limited prime stock and subsequently the market has been starved of product.”
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