THE Scottish commercial property sector can defy wider macroeconomic malaise in 2017 thanks to strong fundamentals, comparatively attractive lease structures and relatively cheap stock.

Industry experts have said that while UK funds remain cautious of investing in office blocks in Scotland’s cities, overseas investors are drawn to these attractive market conditions, and favourable exchange rates.

And with new Grade A office space in “severe shortage”, and speculative builds unlikely, refurbishments will continue to draw investment this year.

Miller Mathieson, executive director, Edinburgh Capital Markets at CBRE, notes: “It has been robust but it’s actually quite fragile, so you’ve seen some good quality product not sell so quickly, or have as long a list of potential buyers,” he says.

“The market has, to some extent, got away with this because there have been enough buyers, but we have seen prices for the best assets definitely soften.”

Chris Macfarlane, director, JLL Edinburgh, agrees the continuing polarisation will continue.

“If you have a product that is well-let, with long leases and strong covenants there is still a strong market. You have to be careful on your pricing from day one to ensure something is sellable, so overall the picture is one of an unclear macro landscape but there are pockets of activity that are quite encouraging.”

Alasdair Steele, head of Scotland commercial at Knight Frank, adds: “With some of the biggest assets in Scotland’s three main cities likely to come up for sale in the next 12 months, 2017 will be an interesting year for the commercial property market. Of course, the small matter of the UK’s withdrawal from the European Union will dictate, to some degree, how active a year we have in store.”

While investment in Edinburgh hit a 10-year peak in the first nine months of 2016, Glasgow was relatively quiet – though movement is expected to pick up, with UK funds potentially re-emerging in the latter half of the year, in spite of political uncertainty.

“The underlying fundamentals are very strong in Glasgow and Edinburgh, where local economies are both strong,” says Mr Mathieson. “The frustration is we are seeing a lack of speculative developments.”

Mr Macfarlane says stock is a concern for companies “looking for big chunks of space,” which could lead to more pre-let builds.

This shortage of Grade A space in particular across both cities will continue to apply pressure on the supply side, though while there are no new builds on site in Glasgow, there are a number of buildings that can be refurbished to a Grade A standard within around nine months.

On the demand side, in addition to macro uncertainty, the lack of available stock is a impeding those firms actually willing to move.

“Because of all that I believe there will be upward pressure on rent in the next 12 to 24 months,” says Mr Mathieson. “But even with that as a key driver we’re not seeing pricing for investments get keener. It seems if anything that it’s being getting softer.”

The reason for this, he says, is that buyers who would normally pay top-end prices aren’t in the market, which in turn is playing well for more opportunistic buyers.

“The market is perfect for them at the moment,” says Mr Mathieson. “Good quality assets [are available] at sensible prices without competition from people who have access to cheaper money.”

Nick Penny, head of Scotland at Savills, says: “Whilst some investors opt to hold out, others who are more opportunistic, are taking advantage of the reduced competition and overseas investors continue to prevail in Scotland.”

Later this year, the Scottish Government will make a long-awaited decision on business rates re-evaluation. Ensuing savings, says Mr Mathieson, are only theoretical.

“There is no way the government can allow their business rates receipts to reduce,” he says. “The consequence of reducing by a pound business rates in a poorer area, you need to raise it an additional pound somewhere else, and my concern is that in a lot of those locations the issues are much more fundamental than cost.

“The problem is that in helping some areas they are going to hurt others and I don’t believe the help they will give is going to be that beneficial.”

Mr Mathieson cited the hotel and restaurant sectors in Glasgow and Edinburgh as those which could be hit by rates changes.

In Aberdeen, the oil and gas downturn continues to blight the city. In March 2014 there was an estimated 430,000sq ft of office space available in the entire city. Today, that is 2.5 million sq ft.

However, building work is underway in the city, and Mr Mathieson says good buildings are going up in good areas.

“There is no question the market is going to be faced with a huge oversupply in the foreseeable future, [but] Aberdeen has been through this before and one thing that is positive is that the quality of stock in and around the city it is better than it’s ever been,” he says.