According to the latest figures released by Lismore Real Estate Advisors, investments in Scottish commercial real estate have performed surprisingly well throughout 2021 despite volatile market conditions.
According to the figures, investment volumes reached around £ 1.345 billion, an increase of 24% from the total for 2020.
The emergence of the Omicron variant and the return of restrictions continue to pose challenges across the property market and the global economy, but fourth-quarter trade remained strong at £ 520million, up from 27% compared to the fourth quarter of 2020.
Major transactions included the £ 32.2million sale of Sainsbury’s to Inglis Green Road, Edinburgh by Inglis Property LLP to Urbium Capital Partners LLP, the off-market sale of Scania to Eurocentral by West Ranga Property Group to DVS Property for £ 10.725 million and the € 58 million Sale of Exchange Place One in Edinburgh to CBRE Investment Management.
Chris Macfarlane, director of Lismore, said the “wall of foreign capital chasing stocks” continues and prices have reached pre-pandemic levels in the grocery, logistics and retail sectors. retail warehousing.
However, he warned that challenges remain for much of the city’s retail / leisure business and that investors continue to struggle with office space, other than the best quality or that can be adapted to meet referrals. More difficult ESG.
Mr Macfarlane said: “Looking at market themes, one part of the market that was initially hit hard but rebounded (in part) very strongly is the alternatives sector, covering PBSA, hotels under management contract. and serviced apartments. The strongest, best-located assets have seen their occupancy rates recover and while net operating income may not quite have returned, investor interest has been sparked by their resilient qualities.
“In terms of price, food stores, convenience stores and distribution saw the biggest increase in returns between 50 and 100 basis points during the quarter. Core-plus opportunities have been relatively limited, but we are seeing lower prices around grade B offices as investors face increasing levels of capital spending and ESG challenges. The only sector that really offers “value-added” pricing is the shopping center market where the risk remains but where the best assets are starting to find their level, between 50 and 90% of discount compared to the purchase levels.
With a seemingly brighter outlook for 2022, the latest investor research undertaken by Lismore predicts that the top three performing industries in 2022 will be retail warehousing (36%), distribution (28%) and industrial multi-tenancies. (17%). Although blue chip yields have started to harden, retail warehousing still offers good value given the rapidly changing retail market and strong professional demand.
Support for grocery stores declined significantly (6%), perhaps a recognition that much of the sector’s performance was achieved in 2021. The office sector was the worst supported by retailers. respondents, with concerns about investment needs and future work habits. being mentioned as headwinds for the area.
A significant majority (69%) of those surveyed in the Lismore study expect to be net buyers in 2022, with 21% being neutral. Investment managers and real estate companies appear to be the most buyers with 83% and 73% respectively anticipating that they will be net buyers in 2022. Just over 50% of the funds and private equity firms surveyed are expect to be net buyers. Only 10% of those surveyed expect to be net sellers, suggesting another year of limited stock and inevitable pricing pressures for the best opportunities.
Mr Macfarlane added: ‘Institutional activity in the UK remains very much focused on longer term defensive stocks, including warehousing and retail distribution, although we have seen a welcome return of a institution in the Edinburgh office market for the first time in several years.
“Foreign investors continue to target Scotland (Edinburgh in particular) with buyers from the Middle East and mainland Europe all remaining active, but the overwhelming weight of capital has come from North America. The level of distressed sales continues to be very limited, with the more opportunistic buyers looking higher on the risk curve, whether direct development, vacant buildings or shopping centers.
James Dunne, UK Head of Transactions at abrdn, commented: “The pandemic has highlighted the benefits of having a diversity of incomes and industries within a portfolio. The breadth of alternative sectors provides a growing share of the real estate investment market, with the hotel sector providing an interesting model of sustainability. However, this recovery trend has been narrow and will continue to be driven by the best assets and the best locations significantly outperforming the market.
“The extended stay market (aparthotels and serviced apartments) was already growing and the ability to move from more lucrative short stays to a longer term model provided income certainty and meant that the industry made proof of a very strong resilience throughout the worst of the period. pandemic and therefore a strong justification for investing both for protection in the event of a downturn but also for the performance expected in a more normal market. “
He added: “We are still in the early stages of transforming real estate attitudes, from providing space as a product to embracing space as a service. The most visible sector where we have seen a continuous shift towards a more servicing real estate environment is the office sector.
“It has accelerated and this is an area that could continue to develop rapidly with the long term return to the office. The retail sector will need to continue to adapt if it is to remain relevant to consumer demands and deliver more experiential retail, most likely digitally capable of leading a partial and targeted recovery of the sector. “
Mr Dunne concluded: ‘The only thing we can be sure of is that the evolution in the way real estate is used and delivered and the increase in’ hotelization ‘of all industries will continue. at a steady pace over the next few years and we, as investors, must continue to not only adapt, but move forward.