THE lack of high-quality speculative office development in Scotland’s two biggest cities has been pinpointed as a barrier to growth by a senior commercial property figure, who insists the demand for premium space has not been disrupted by Brexit uncertainty.
David Davidson, chairman of Cushman & Wakefield in Scotland, said major investments in new offices by Barclays and CYBG in Glasgow and Baillie Gifford in Edinburgh underline the appetite among major businesses for state of the art accommodation.
But he said the pipeline of new development is not sufficient to keep pace with demand from businesses looking to expand.
Referring to the Barclays and CYBG projects, Mr Davidson said: “These are all good for the city, but there still is a problem, which is [that] there is a limited amount of speculative space. Typically there would be 700,000 to 800,000 sq ft of space pre-let, but if it does not exist it won’t happen.”
He added: “Where will all the tenants of the future lease space if there is no new office space being built? It is the same in Edinburgh.”
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Mr Davidson welcomed the start of work on the Atlantic Square project, next door to Atlantic Quay 1 in Glasgow’s International Financial Services District, and the construction of new headquarters for CYBG on Bothwell Street. However, Mr Davidson pointed out that the developments have largely been pre-let, with HMRC signing a 20-year deal on Building 1 at Atlantic Square.
Building on the theme, he observed that, of the three current developments in Edinburgh, one in St Andrew Square has been fully pre-let to Baillie Gifford, while two tenants have been secured for the Capital Square project. No tenants have yet been lined up for the 2 Semple Steet development. But there are no new projects in the offing.
Mr Davidson said the absence of speculative developments comes despite strong demand from potential occupiers.
He said: “Surprisingly, against all the political uncertainty, [with] CYBG signing [up for] their new HQ, there’s business drivers encouraging occupiers to look for upgraded, modern, efficient office premises.
“The hope is that these projects will not be slowed down, or worse stopped, by Brexit. But so far most of the projects have progressed in 2018.”
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Asked why he believes there is currently a lack of speculative office projects, Mr Davidson said: “The positive [spin] is that there was an over-build in 2005 to 2007, and in the last property boom in 2000, when there was too much space and funded by banks predominantly.
“The good news is that, on the one hand there is control over supply, so there isn’t over-building.
“Unfortunately, there is insufficient risk capital in the market to build speculatively. And it is not just in Scotland – it is Manchester, Birmingham, and London, albeit there is speculative space being built in London.
“It is a market-wide issue, not just a Scottish issue. Pension funds, and equity investors who previously funded speculative office space are much more risk averse generally, not just because of Brexit.”
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That does not mean demand from potential investors, such as pension funds, for existing building stock is not strong. Mr Davidson said: “There is very strong demand where there is income, and Glasgow and Edinburgh are very resilient, so when new buildings are completed there is strong demand to buy them, the only exception being Aberdeen.”
However, he said there is growing optimism “on the ground” in Aberdeen of an upturn in commercial activity this year, which has come on the back of improving sentiment in the oil and gas industry. This could see the development of new space, and improve confidence in all aspects of the commercial market, “even retail”.
Mr Davidson added: “Aberdeen is currently out of favour with most investors, so there is a discount, a big discount.”
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