The Scottish commercial property market experienced a drop in investment volumes in 2023, compared to the previous year, due to the impact of the Covid-19 pandemic and the uncertainty surrounding the UK’s exit from the European Union. However, the market also demonstrated resilience and optimism, as some sectors and regions performed well and attracted strong interest from domestic and overseas investors.
Covid-19 and Brexit affect investment activity
The Covid-19 pandemic and the Brexit negotiations had a significant effect on the Scottish commercial property market in 2023, as they created challenges and opportunities for different sectors and locations. According to a report by Savills, the total investment volume in Scotland was £1.86 billion in 2023, down by 22% from £2.39 billion in 2022. This was also below the five-year average of £2.15 billion.
The report attributed the decline to the reduced activity in the first and fourth quarters of 2023, when the Covid-19 restrictions and the Brexit deadline dampened the market sentiment and the deal flow. The second and third quarters, however, saw a rebound in investment activity, as the easing of lockdown measures and the progress of the vaccination programme boosted the confidence and the demand of investors.
The Covid-19 pandemic also had a differential impact on the various sectors of the Scottish commercial property market, as it accelerated some existing trends and created new challenges and opportunities. The retail sector, which was already facing difficulties before the pandemic, suffered the most, as the lockdowns, the social distancing measures, and the shift to online shopping reduced the footfall and the revenue of physical stores. The retail investment volume in Scotland was £216 million in 2023, down by 29% from £303 million in 2022, and the lowest since 2009.
The office sector, on the other hand, showed more resilience, as it benefited from the limited supply and the strong demand for high-quality and sustainable space in the major cities of Scotland. The office investment volume in Scotland was £612 million in 2023, down by 11% from £694 million in 2022, but still above the five-year average of £590 million. The office sector also witnessed some notable deals, such as the sale of 177 Bothwell Street in Glasgow to Pontegadea, a Spanish investment house, for £200 million, which was the largest office transaction in Scotland’s history.
The industrial sector, which was the best performing sector in 2022, saw a slight decrease in investment volume in 2023, as the supply of available assets became scarce and the competition among investors intensified. The industrial investment volume in Scotland was £287 million in 2023, down by 7% from £309 million in 2022, but still above the five-year average of £230 million. The industrial sector also recorded some high-profile deals, such as the sale of Amazon’s distribution centre in Dunfermline to Legal & General for £66.8 million, which was the largest industrial transaction in Scotland in 2023.
The alternative sector, which includes hotels, student accommodation, healthcare, and leisure, saw an increase in investment volume in 2023, as it attracted more interest from investors who were looking for long-term income and diversification. The alternative investment volume in Scotland was £545 million in 2023, up by 85% from £295 million in 2022, and the highest since 2018. The alternative sector also accounted for the largest share of the total investment volume in Scotland in 2023, at 29%, followed by the office sector at 33%, the industrial sector at 15%, and the retail sector at 12%.
Regional variations and investor preferences
The Scottish commercial property market also exhibited regional variations in 2023, as some areas performed better than others, depending on the local economic conditions and the availability of assets. According to a report by Knight Frank, Glasgow saw the highest investment volume of Scotland’s three largest cities, at £469 million, followed by Edinburgh, at £464 million, and Aberdeen, at £143 million. Glasgow and Edinburgh also recorded higher investment volumes than their five-year averages, while Aberdeen saw the highest amount since 2019.
The report also noted that overseas investors continued to account for the majority of deal activity in Scotland, with a 52% share of investment volume in 2023, followed by property companies, with a 35% share, and UK institutions, with a 5% share. The report attributed the strong interest from overseas investors to the attractiveness of Scotland’s commercial property market, which offers higher yields and lower prices than many other parts of the UK and Europe. The report also highlighted the role of property companies, which were active buyers and sellers of assets in Scotland, as they sought to reposition their portfolios and capitalise on the market opportunities.
Outlook for 2024 and beyond
The outlook for the Scottish commercial property market in 2024 and beyond is positive, as the market is expected to recover from the impact of the Covid-19 pandemic and the Brexit uncertainty, and to benefit from the improving economic and political stability. Savills forecasts that the investment volume in Scotland will surpass £2 billion in 2024, as investors resume their buying strategies and take advantage of the attractive pricing and the limited supply of assets. Knight Frank also predicts that the market will see more activity and liquidity in 2024, as the cost of debt eases and the pool of buyers expands.
The sectoral and regional trends that emerged in 2023 are likely to continue in 2024 and beyond, as the market adapts to the changing consumer behaviour and the environmental, social, and governance (ESG) factors. The retail sector will face more challenges, as the online competition and the consumer preferences will put more pressure on the physical stores and the landlords. The office sector will see more demand for flexible, modern, and green space, as the hybrid working model and the sustainability agenda will shape the occupier requirements and the investor preferences. The industrial sector will remain in high demand, as the growth of e-commerce and the need for logistics and storage will drive the occupier and the investor appetite. The alternative sector will offer more opportunities, as the long-term income and the diversification benefits will appeal to the investors who are looking for stable and resilient returns.
The Scottish commercial property market is poised to rebound from the challenges of 2023 and to achieve growth and success in 2024 and beyond, as it demonstrates its strength, diversity, and potential.
