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02 March 2012

Edinburgh office market tough in 2012 - opportunities for new development

2012 is forecast to be another challenging year for the Edinburgh office market but savvy investors will see opportunities for new developments and rental growth thanks to the restricted supply pipeline, according to BNP Paribas Real Estate’s latest office market report.

Research from the leading real estate adviser showed that Edinburgh office take-up in 2012 is likely to exceed 2011 levels and that there is likely to be a revival in the pre-let market.

Don Young, senior lettings & sales director at BNP Paribas Real Estate’s Edinburgh office, comments: ‘After a quiet 2011, we anticipate more activity in 2012 with several sizeable active requirements now in the market.  As opportunities for existing grade A space in Edinburgh become restricted, we expect pre-letting activity to pick up and, as competition for the best space intensifies, incentive levels will come down.

‘There is currently one speculative office development due to complete in 2013 which means there is strong potential for prime rents to rise. With so little development in the pipeline, there are good opportunities for developers to take advantage of the market.’

Office take up in Edinburgh was 498,170 sq ft, down 16% on 2010 levels and 89% of deals were under 10,000 sq ft. 2011 did see activity from some high profile names such as Amazon taking 57,500 sq ft at Highcross’ Waverley Gate, Virgin Money who sub-let almost 30,000 sq ft at 28 St Andrew Square and banking software specialist Avalog Innovation who took over 20,000 sq ft at Tanfield for a new Scottish Development Centre. Edinburgh does remain one of the few UK regional cities with on site speculative development at Atria. Prime rents fell 4% to £27 per sq ft reflecting the reduced demand levels and limited availability of Grade A space commanding top rents.

Office investment in Edinburgh in 2011 ended the year at £71.3m, 51% down on 2010 levels with a reduction in both the number and size of deals.  This fall represents the absence of schemes, diminished volume of property with secure tenants available to buy, coupled with a profusion of secondary stock.

Richard Williams, investment director at BNP Paribas Real Estate’s Edinburgh office, says: ‘We expect transactional volumes to remain low as prime or secure assets remain absent from the market. The oversupply of secondary offices means that we expect values to fall in line with market pricing.  As supply constraints and pent up rental growth impact, there is the potential for prime yields to start to move in. With rental growth expected, there may be opportunities for investors interested in looking at new development funding opportunities.’

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