North East Market Holding Its Own

By Angus MacCuish, managing director of FG Burnett

It’s the $64 Million Dollar Question – has the commercial property market reached the bottom or will it descend further? My view is that here in the North East the market is holding up remarkably well, especially when compared to elsewhere in Scotland and the UK.

Demand for offices, both from a leasing and purchase perspective, is still at a healthy level with headline rental levels being maintained. Landlords however, are having to more flexible in negotiation with tenants than was the case 12 months ago, with tenants securing greater concessions on ‘softer’ elements of deals such as rent free periods, contribution to fit-out, break options and shorter leases.

It’s a similar story with industrial property, with rents also holding up, but again landlords should be prepared to be more flexible in order to secure deals.
There is mounting evidence that well-established food discount retail chains are being very aggressive in expansion terms – the current economic climate favours this particular business model - and this will generate further activity.

Demand for secondary retail is also encouraging and we have personal experience of this with a significant number of deals being concluded recently in Aberdeen and surrounding towns.

On the development front it is changed days from this time last year with very limited interest. On the plus side, however, there are signs that developers are starting to put their heads above the parapet again, although limitations on funding going forward will mean they will be more selective in their pursuit of sites, which has a consequential impact on prices.

There is some limited activity in the investment sector with cash rich individuals and companies still trying to decide if the market is at the bottom or not. For what it’s worth, I think the market has bottomed out, although the cost and availability of debt finance means that the market is not functioning properly.

What we are seeing in Aberdeen is quite different from a UK perspective where investors have to factor in the fact that rents are under huge pressure and are falling quite dramatically as occupier demand continues to fall.

Locally, there is a good level of demand for opportunities with shorter income streams or break options which offer higher income returns to compensate for the increased level of risk.
The essence of property investment is the pricing of risk – we know from advising our wide variety of clients that many are willing to buy shorter leases for higher income yields and that reflects their confidence in the local economy. It is possible to acquire modern office buildings in Aberdeen at yields of circa 8.75 - 9.0% on five year leases. The West End remains the favoured location for many office investors – its enduring appeal means that supply is very limited and as a consequence prices have remained strong.

My view is that compared to what investors can earn on cash, commercial property remains a good bet and when UK plc starts to believe things are getting better, some of the current property investment opportunities are going to look very cheap indeed.

While banks have not had to seek criticism it seems, to their credit, they are holding firm with investors, even those in breach of covenants. The prevailing attitude appears to be as long as there is income to service interest cover, the banks will support the status quo in the short- term and cutting their losses – which could simply drag down the market further – is not an option