Is Aberdeen back on the property investor’s shopping list?

There has been a notable shift in investor sentiment towards Aberdeen’s commercial property market in recent months and 2018 could see investment volumes returning to, or indeed exceeding, the 10-year average, writes Mark Fleming, director in the investment team at Savills in Scotland. The Scottish city is near unique in its abundance of long-term, index-linked, income producing assets, which were prelet and built between 2012-14 to satisfy demand from occupiers who had little to choose from in terms of existing stock at a time when the oil and gas sector was booming.  Global and domestic energy occupiers scrambled to have a foothold in the European energy market capital, and at one point in 2013 there was only 10,000 sq ft of grade-A office space available in Aberdeen to satisfy more than 1m sq ft of active requirements. As such, developers were able to command attractive lease terms (such as long leases with index-linked reviews), from occupiers which needed to expand and move to better quality offices in order to retain and recruit the skilled workforce necessary to compete with others in the industry. Demand affects rental growth The resulting strong rental growth in the face of this overwhelming demand pushed grade-A rents north of £30 per sq ft, in some cases reflecting growth of 30% over two years. All this activity and rental growth in turn attracted strong levels of investment activity, driving prime office yields down to 5.5%-5.75% and putting Aberdeen on a par with Edinburgh and Glasgow.  [caption id="attachment_909812" align="aligncenter" width="847"] There has been a recovery in the price of Brent crude[/caption] Following the crash in the price of oil (which hit a low of around $28 per barrel in 2015), Aberdeen’s property market suffered a consequential slump in activity, where take-up fell and supply of accommodation across all sectors increased. However, in tandem with the strong recovery in the price of Brent crude seen in recent months – which at the time of writing in March 2018 is hovering around $68-$70 a barrel – the city’s office occupier market is picking up once more. This modest improvement in occupational markets is coinciding with a renewed interest in the city from investors, particularly from overseas, including Middle Eastern and US equity.The current activity is not necessarily just down to a recovery in the price of Brent crude. Renewed investment Indeed, it is more likely to have been sparked by the devaluation of sterling, coupled with the current soft pricing of investment stock in Aberdeen (following the oil crash), making it significantly cheaper than elsewhere in the UK. However, this recovery in Brent crude and a perception that the worst is over may continue to fuel this renewed investment activity. Key deals illustrating this activity include the acquisitions of: Lloyd’s Register building on Prime Four Business Park for circa £40m; Total’s HQ at Westhill Business Park for £39.4m; Statoil’s HQ office, also on Prime Four Business Park, for circa £13.8m; and Ensco House, Gateway Business Park, for circa £6.8m. It is fair to say that the current interest is relatively risk adverse and far more focused on the cash-flow attributes of the deal. This includes the quality of tenant(s), length of lease and indexed rent review mechanisms, rather than simply the intrinsic property characteristics (such as  location, specification and rental growth prospects). We are operating in a significantly different marketplace to where we were three to four years ago, but so long as the strength of the tenant is assured and debt is available, with these attractive yields on offer, the investor can be “guaranteed” generous cash on cash returns far superior to those on offer elsewhere in the UK.