An insight into the commercial property market
2020
The Aberdeen Report
knightfrank.com/research
contents
THE aberdeen REPORT 2020
3
Aberdeen Land - A Decade Of Volatility
5
Aberdeen Office Market: Strongest Since 2014
6
Industrial Demand is Improving
7
A Decade Of Influence
8
Locally Expert, Globally Connected
4
Capital Markets
10
Our Research
As of early 2020, we have seen material impacts to global markets following the COVID-19 pandemic. This, along with the oil price conflict between Saudi Arabia and Russia has resulted in a turbulent oil and gas market. Brent Crude was trading at close to US$60 per barrel in February 2020, however, is now trading at around US$30 per barrel (as of 25th March 2020). This will clearly have an adverse impact on the local economy in the north east of Scotland and we have already seen an impact on decision making for commercial property in the region. This being said, we expect there to still be a demand for commercial property across all sectors, from both occupiers and investors. This report looks back on what has happened in 2019, which was a very positive year with strong occupational demand and a robust investment market. Although our outlook pieces were written prior to this global pandemic, they reflect the positive sentiment within the commercial property market at the time. Whilst there is uncertainty in the market now, both oil and property markets have shown historic resilience to major global events by being able to innovate and adapt. With a number of exciting public and private sector projects proceeding and an improving working environment, this should ensure that Aberdeen and Aberdeenshire’s commercial property market remain in resilient shape. A sustained period of recovery in the occupational market is beginning to help drive greater investor interest in Aberdeen. Although the oil price has, and remains to be the biggest driver of economic performance, Aberdeen has benefitted from an influx of public and private money, which has supported regeneration. Each project has contributed to an improvement in the quality of the built environment and economic productivity, which has helped reinforce the competitive position of Aberdeen as not only the energy capital of Europe, but also as an attractive place to live, work and invest.
Aberdeen land - A decade of volatility
Eric Shearer
Land and Development
The last decade has been interesting as far as property development in Aberdeen is concerned. We have seen extraordinary highs and depressing lows all crammed into the years between 2010 and 2019. The first five years of the decade saw the biggest boom that I have experienced in my 40 years in the property industry. The combination of record oil prices and the influx of institutional investors to the city drove the price of land in every sector to record levels. Residential land values moved into the seven-figure bracket per acre. Closing dates for housing sites were commonplace with, in some cases, over ten house builders competing for the same site. Likewise, commercial land values reached record levels. Land for office development also generated millions of pounds per acre bids and the record price for industrial land was achieved at D2 in Dyce at just over £640,000 per acre. As in all markets, the irresistible forces of supply and demand came into play with record rents for commercial property combined with record low yields and the arrival of the institutional funds to the Granite City driving land values upwards. Add to this the snail’s pace delivery of new planning consents and the consequences were inevitable. The second half of the decade saw the chill wind of the oil price crash. For the first three years (2015 - 2017), the market froze. With huge job losses, confidence in the residential market evaporated almost immediately. However, in the commercial sector, there was more of a lag with values neither rising nor falling with an undercurrent of market sentiment that prices had to fall with tens of thousands of jobs disappearing. It is fair to say that the residential land market reacted quicker, with land values falling rapidly (assuming you could find a buyer). In the residential land market, the sums are pretty simple. If you had to drop the value of a house by 10%, then the relative drop in land value was hugely magnified and, in many cases, meant land values fell by over 30%. I am aware that there were instances in more rural locations where residential land values fell by 80% from the peak. The effect on commercial land values has been much more difficult to prove simply because there have been fewer than three transactions in the past four years of the decade. Most commercial development land is owned and controlled by developers who do not have to sell. However, what we are now beginning to see are brownfield redevelopment opportunities arising out of the fact that empty commercial buildings are having to be demolished to remove the
huge empty business rates burden (most of which have little chance of finding tenants in the foreseeable future). We have already seen Silverburn House at Bridge of Don, and Kirkhill Business Park being demolished, and I foresee as much as 700,000 sq ft of vacant office space going the same way in the next 18 months. Demolishing perfectly good buildings is not only simply daft, it is also environmentally indefensible as the carbon footprint of producing these buildings was huge. We are now seeing activity in the brownfield redevelopment market which is exciting. Industrial land values are now around £200,000 - £250,000 per acre, more than half of what they were at the peak of the market. Having said that, there are very few transactions simply because the small number of buyers that exist think the price should be less than £200,000 per acre and the sellers think the value is north of £300,000. There is growing interest from developers in vacant city centre offices as potential sites for either new-build PRS or residential conversions, such as The Point by Dandara at Triple Kirks. The Aberdeen City Centre Masterplan is now showing positive progress with the completion of a number of public realm projects and on-going works at Union Terrace Gardens. I hope that this momentum and an improving local economy will see progress on other proposals such as the Queen Street mixed-use development. I am hopeful that the first half of this new decade will see us move into a phase of renewal due to increased confidence in the North East economy and businesses and government (both central and local) working together.
Broad Street
The Point
Chris Ion
16 North Esplanade West
2019: A review
2019 saw a market undermined by political uncertainty. Investors were unable to gauge a clear direction of where the market was heading and investment volumes for commercial property across the UK were down 14% when compared to 2018. Against that backdrop, investment levels for the office and industrial sectors in Aberdeen were robust, largely being on a par with the past two years. The total volume of transactions for the combined office and industrial sectors in 2019 was £185m vs £206m in 2018, across a similar number of transactions. The largest transactions in each sector occurred in Q4 and both provided a further vote of confidence for Aberdeen. LCN Capital Partners purchased Sir Ian Wood House, their third high profile purchase in the city in many years and Aberdeen Standard Investments purchased Badentoy North, their first purchase in the city since the oil crash in 2014. A key theme for Aberdeen, and indeed Scotland, is that the proportion of buyers from overseas has never been greater, with more than half of investment coming from international sources. Interest from the Middle East has been particularly strong in Aberdeen, with evidence from TechnipFMC, Enterprise Drive and the Atmosphere 1, Prospect Park transactions.
2020: A vision
A combination of a sustained period of recovery for the occupational markets and increased weight of money seeking UK stock could encourage greater levels of investment interest in 2020/2021. Additionally, the improving balance sheets of many of the city’s energy occupiers should allow for a greater number of buyers being enticed into the city as the risk and return dynamics look increasingly favourable. However, a lack of sellers could temper transaction volumes.
Investment Volumes (£m)
Key Transactions – All Sectors
160
140
120
100
80
60
40
20
0
2015
2016
2017
2018
2019
£m
Offices
Industrial
Source: Knight Frank Research/Property Data
Atmosphere 1
Sir Ian Wood House
Aberdeen Office Market: Strongest since 2014
Matt Park
Office Agency
Introduction
The recovery of the occupational market continued in 2019. A total of 513,525 sq ft of office space transacted during the year, an increase of 32% since 2018 and the highest annual take-up since the oil crash of late 2014. Significantly, 2019 recorded the least volatility in oil price for six years, meaning occupier confidence responded positively.
Union Plaza
Take-up vs Oil Price
600,000
sq ft
500,000
400,000
300,000
100,000
200,000
US$ per barrel
Take Up (sq ft)
Brent Crude Oil Price (annual average)
Source: Knight Frank Research/Macrobond
Take Up and Supply
Interestingly, larger transactions have been spread throughout the city, demonstrating the impact that the new Aberdeen Western Peripheral Route is having on occupiers’ decisions on where to locate to, with Dyce and Westhill being the biggest beneficiaries. Key deals in the past year have included Oceaneering committing to a sub-lease of 51,356 sq ft from AKER Solutions at Aberdeen International Business Park in Dyce and TAQA taking 76,620 sq ft at Prime Four Business Park in Kingswells. Total supply in Aberdeen is currently sitting at 2.49m sq ft with the majority (44%) located in the city centre. Nonetheless, we are seeing healthy enquiry levels for Grade A supply with a continued ‘flight to quality’, with occupiers moving away from traditional cellular townhouse offices to modern energy-efficient open-plan offices. New build and refurbished property have a considerable advantage over older, poorer quality stock, and with the current development pipeline lag, it is feasible that we could begin to witness a shortage of Grade A stock in the city centre in the not too distant future.
Take-up vs Supply
Grade A supply
Take-up
Source: Knight Frank Research
Key Transactions
Development Pipeline
Outlook
With new entrants of private equity-backed companies continuing to buy up North Sea assets and the return of drilling contractors, we are witnessing an improved Energy Sector confidence, which is creating further requirements across the city for Grade A office supply. Prime rents remain at £32.50 per sq ft for new-build city centre stock. We anticipate that these will remain at this level in 2020, although we expect incentives to come under pressure to reduce. Recently, there has been a trend for vacant, functionally obsolete office buildings in Aberdeen to be converted for alternative uses, such as PRS schemes and industrial developments, rather than refurbished and continuing as offices. In some extreme cases, we are seeing landlords demolish office buildings in order to mitigate business rates.
Take-up by Sector 2019
49%
15%
10%
9%
7%
4%
3%
1%
Energy & Utilities
Construction & Engineering
Professional Services
Other
B2B
TMT
Pharmaceutical, Medical Healthcare
Finance, Banking, Insurance
Manufacturing & Fast Moving Consumer Goods
Retail, Distribution & Transport
The development pipeline mainly consists of proposed schemes only. None of these developers are likely to begin works unless a pre-let is secured or a sustained market recovery is recognised. The only exception to this is the two new speculative offices being developed in Westhill by Knight Property Group, totalling 21,100 sq ft.
Unsurprisingly, Energy and Utilities has been the most active sector in 2019 accounting for 49% of take-up. Construction and Engineering accounted for 15% of deals done with Professional Services in third place with approximately 10%.
700,000
800,000
Industrial demand is improving, but is there sufficient stock?
Scott Hogan
Industrial Agency
Industrial take-up has traditionally been dominated by oil and gas firms. As positivity continues to grow within the energy sector, so has demand within the industrial market. 2019 saw take-up of just under 720,000 sq ft, a total 13% ahead of 2018 and the fifth year of consecutive year-on-year improvement. The number of transactions throughout 2019 also increased significantly with 23% more transactions than recorded in 2018. Despite the majority of demand being for properties sub 10,000 sq ft, there were a number of larger transactions of note. The largest letting of 2019 saw Oceaneering agree a pre-let on the design and build of an 88,000 sq ft industrial unit in Dyce. There were also other large occupational deals recorded across Aberdeen’s industrial estates in Altens, Bridge of Don and Westhill. The main consideration derived from the key transactions is that occupiers are increasingly concerned with quality and are choosing to occupy the best space, despite potential increases in cost.
Industrial Take-up (sq ft)
A Shortage of Stock?
As of Feb 2020, supply was close to 2.85 million sq ft. Despite this, the biggest threat to the industrial market in 2020 will be a shortage of brand new or good quality stock across the various size bands, in particular, for properties over 10,000 sq ft. This may mean occupiers either choose to remain in their existing accommodation or engage the highly competitive landscape of limited new build stock, forcing incentives to become more competitive. “Build it and they will come” is a phrase that has rarely been used since the oil price crash, however, it is now increasingly part of an industrial surveyor’s vocabulary. Although occupier demand is likely not strong enough to warrant an influx of speculative development, take-up of the existing new stock currently on the market will cause further strain on Grade A supply. Occupiers have demonstrated that they are willing to pay headline rents in order to occupy the best space, from smaller terraced properties to larger detached facilities. Further speculative development is expected in 2020, some of which is already underway in the main industrial areas. One area of the market potentially overlooked by developers is mid-range industrial units or ‘smaller Aberdeen units’. There is generally a shortage of units between 8,000 and 12,000 sq ft, particularly those of good quality. This is an area of the market, which we believe could be exploited by speculative developers to secure tenants on strong commercial terms with limited void periods.
Industrial Deals by Size 2019 (sq ft)
29%
28%
23%
12%
5%
2%
Under 2,500
2,500 - 5,000
5,000 - 10,000
10,000 - 20,000
20,000 - 40,000
40,000 +
E8 Gateway
A decade of influence
Knight Frank offers a comprehensive range of commercial property services to best meet the needs of property owners, buyers, tenants and developers across Aberdeen and beyond. Over the past decade, we have been involved in a wide range of instructions, from assisting tenants in securing new premises to advising institutional funds on investment purchases, with building consultancy and a range of valuation instructions in between.
2010
2011
2012
Land Sale of Stoneywood Estate, Dyce
Bibby Offshore, pre-let of Atmosphere One, Westhill
Wellheads Industrial Centre, Dyce Investment Purchase
Annan House, Aberdeen
Sale of Scotland’s first PRS Scheme – Forbes Place, Aberdeen
Subsea 7 assignation of West Campus Westhill to Total S.A
£100 million + Loan Security Portfolio Valuation
Purchase of Queen Street Church
2014
2013
Aker HQ Letting and Investment Sale
Project Monitoring of Tetra House, Aberdeen Gateway
Knight Frank sold a 41.73 acre site at Stoneywood Estate to Dandara. Knight Frank has continued to be involved by providing loan security residential development valuations.
Knight Frank acted for the tenant in securing a new Design & Build 53,500 sq ft office. Our Building Consultancy team was also instructed to design and monitor the construction.
Knight Frank acted on the investment purchased on behalf of CBRE GI. Knight Frank has continued to be involved since the purchase date, acting on both an agency and building consultancy capacity.
Acting on behalf of the tenant, Knight Frank advised on the project monitoring of a brand new 60,000 sq ft industrial and office building. Knight Frank also designed and monitored the fit out works.
Knight Frank acted for the landlord and subsequent vendor on the sale of, at the time, Scotland’s largest letting - a 335,000 sq ft Grade A office.
Acting for the tenant and vendor, Knight Frank advised on the sale and 20-year leaseback of a brand new office of 21,597 sq ft in the heart of Aberdeen.
Knight Frank advised Dandara on the sale of Forbes Place in Aberdeen, Scotland’s first PRS scheme.
Knight Frank completed one of the assignations of 108,000 sq ft of office space, acting on behalf of the tenant and subsequently acted for M&G in the investment sale.
Knight Frank managed the sourcing and purchase of Queen Street Church for continued use as a church & community hub. This is the fourth church in the last decade that Knight Frank has been instructed on.
Knight Frank completed the largest portfolio valuation in Scotland across multiple Scottish cities and property types.
Locally Expert, Globally Connected.
Knight Frank has more than 500 offices across 60 countries and territories, 19,000 people strong.
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Aberdeen TEAM
Partner, Office Head +44 7712 868 594 eric.shearer@knightfrank.com
Partner, Capital Markets +44 7717 425 298 chris.ion@knightfrank.com
Associate, Office Agency +44 7810 599 964 matthew.park@knightfrank.com
Senior Surveyor, Industrial Agency +44 7468 729 768 scott.hogan@knightfrank.com
Richard Evans
Partner, Valuation & Lease Advisory +44 7712 868 555 richard.evans@knightfrank.com
Grant Hendry
Associate, Design & Building Consultancy +44 7825 357 377 grant.hendry@knightfrank.com
Darren Mansfield
Partner, Commercial Research +44 7469 667 194 darren.mansfield@knightfrank.com
A sustained period of recovery in the occupational market is beginning to help drive greater investor interest in Aberdeen. Although the oil price has, and remains to be the biggest driver of economic performance, Aberdeen has benefitted from an influx of public and private money, which has supported regeneration. Each project has contributed to an improvement in the quality of the built environment and economic productivity, which has helped reinforce the competitive position of Aberdeen as not only the energy capital of Europe, but also as an attractive place to live, work and invest.
Knight Frank global research produces market leading residential, commercial and agricultural property reports and indices, as well as undertaking bespoke consultancy projects. Our global network of offices, operating in over 60 territories, means we can carry out research virtually anywhere in world.
Our Research.
Knight Frank Research Reports are available at knightfrank.com/research
Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. Important Notice: © Knight Frank LLP 2020 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.
