Returns on Scottish commercial real estate are continuing to grow above the UK average, according to a new report.
Scottish commercial real estate achieved a total return of 1.7% in the third quarter of 2018, a rebound from the 1.4% recorded in the second quarter, and a return to the same rate of return in Q1.
While there remains a 120 basis point difference between the annual total returns, with Scotland at 7.0% compared to the UK’s 8.2%, three sectors in Scotland – offices, retail and alternatives – are now ahead of the UK as a whole. This is most noticeable in high street retail with annual total returns of 6.4% in Scotland, versus 4.0% in the rest of the UK.
The data, released by property consultant CBRE, reveals the main surprise this quarter in Scotland was a marked improvement for the retail sector. Total returns increased to 1%, a rise of 0.7% from Q2. However, the sector still has the lowest overall return in Q3, behind offices (2.2%), alternative property (2.4%) and industrials (1.9%).
For the third quarter in succession, the annual Scottish all property total return was virtually unchanged at 7%.
Individual sectors have shown more change, in particular offices and industrials. Office annual returns were the only ones to improve over the quarter, rising to 8.6% for the year to the end of September.
In contrast, industrial returns fell slightly to 8.4%, with the alternative property remaining the only sector with double-digit returns over the year (12.6%), well ahead of the weakest performer retail, at 4.0%.
Martyn Brown, a director in CBRE’s investment team, was encouraged by the results. He commented: “International buyers continue to be active in Scotland, attracted by the softer yields and higher returns on offer when compared to similar investment deals south of the border.”
Overall, there was £1.77 billion spent across Scotland during the first nine months of 2018, a 27% rise from the same period in 2017. With over £670m, the office sector has seen more money directed towards it than any other commercial sector. Meanwhile, more than £300m has been spent on retail warehouses.