A leading real estate group has identified a "growing appetite for luxury accommodation" in Scotland's largest cities despite economic difficulties that will continue into 2024.

Commercial real estate giant CBRE has forecast a nascent economic recovery in the second half of next year - when many believe UK interest rates will begin to ease - with a more robust rebound in 2025 as lower debt burdens boost business and household spending. However, significant challenges remain, particularly for the Scottish real estate sector.

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CBRE noted that 850,000 fixed-rate mortgages across the UK are due for renewal next year and will be hit by higher rates at refinancing, potentially leading to reduced household incomes and spending.

Commercial real estate is expected to become more appealing in 2024, particularly in the hotel sector where occupancy rates could for the first time surpass the pre-Covid levels of 2019 amid strong domestic leisure demand and the continued recovery of inbound tourism. 

In Scotland the demand for hotel accommodation is "largely" but not exclusively focused on Edinburgh which is experiencing record levels for room rates. CBRE said new launches such as the W Hotel in St James’ Centre in Edinburgh and the Sandman Signature in Glasgow indicate the "growing appetite for luxury accommodation in Scotland’s largest cities".

While Scotland's office sector is expected to recover in the second half of next year, higher construction and financing costs will limit opportunities to profitably refurbish older stock until market conditions improve. This will particularly impact in Scotland.

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“That said, where values support adaptive re-use of buildings, we have already seen this theme of accelerated change of use proposals and expect it to continue," said Chris Dougray, executive director for development at CBRE Scotland.

“In the case of Edinburgh there are already multiple office to hotel proposals in play – for example Dalata at 28 St Andrew Square, and Point A at 9/10 St Andrew Square.”

Looking at other sectors, CBRE said logistics is expected to experience a moderate rise in vacancy rates. Pricing remains attractive for investors looking to buy retail assets, particularly in retail parks.

The private rented sector, particularly build-to-rent, is facing continued supply shortages while the construction of purpose-built student accommodation is being driven by strong demand against a similar backdrop of limited supply. Self-storage and data centres are forecast to grow.