News Article

Builders Move On To Difficult Ground

31/10/2008

PUBLICATION: FINANCIAL TIMES

By James Buxton It is not always easy to pinpoint the moment when a property market turns. But for the office property market in Edinburgh one such moment was when it emerged during the summer that part of the big Springside project was being put on hold. Springside is a project to redevelop the site of Scottish & Newcastle’s brewery at Fountainbridge, half a mile west of the city centre.

The scheme, by AMA, Grosvenor and Royal Bank of Scotland, is to build 600 new homes and 140,000 sq ft of office space on what has been called Edinburgh’s largest brownfield site. Now, with construction work already under way, the office space to be built is to be halved and the developers are considering building a hotel instead of offices. According to Hamish Sutherland of the property company Colliers CRE,

“if the developers had known what was going to happen in the property market they probably wouldn't have gone ahead in the first place.”

The global credit crunch began in August 2007. The supply of credit by banks and lending institutions was tightened, but the effects only recently became apparent on the ground. Cameron Stott, of Jones Lang LaSalle in Edinburgh, says:

“We were pleasantly surprised in the summer at how well the market stood up. The developers are now getting more nervous, but there’ve been no actual cancellations. The first sections of the Quartermile – [a massive scheme to build 1.6m sq ft of flats, offices and retail outlets on the 19·acre site of the old Edinburgh Royal Infirmary] - are nearing completion.”

Elsewhere in Edinburgh the financial structure of some property schemes is being changed, with new financial partners being brought in, which is likely to reduce the profit that the developer initially envisaged. But Mr Stott says:

“The good thing is that Edinburgh doesn't have the oversupply of office accommodation that cities like Manchester and Birmingham have. That’s partly because five years ago we didn't have new schemes. Supply is still relatively tight and that means we are still predicting rental growth.”

The office property markets in Edinburgh and Glasgow are roughly the same size and top rents for Grade-A space in each city have in recent years come closer together, though Edinburgh is in the lead, at £29 per sq ft compared with £27.50 in Glasgow. But there is a big difference in the type of market that each city serves. Demand in Edinburgh has been driven by its hitherto strong financial sector though the professional services sector is now a significant source of demand.

In Glasgow demand for office space comes from a bigger range of users. It has benefited from inward investment, supported by development assistance from the government and the European Union. It has also been boosted by the decentralisation policy of the previous Labour administration in the Scottish government, under which civil service departments were ordered to move from Edinburgh. Glasgow has had a vibrant office property market in the last few years, “2007 was extremely strong,” says Mike Buchan of Jones Lang LaSalle's Glasgow office.

 “There was a very high rate of take-up of space, and several new schemes were started. New developments were coming out of the ground and quickly being occupied.”

The take-up of completed grade-A office space continued into 2008 but at a slower rate than in 2007. Take-up in Glasgow’s central business district was 167,900 sq ft in the first six months of the year, compared with 457,000 sq ft in the same period of 2007, according to Richard Ellis, the property consultants. As the credit crunch started to bite, property developers began feeling nervous.

 “The high cost of borrowing money, combined with greater construction costs, are now putting developers off,” says Mr Buchan.

Just as is predicted for Edinburgh, he expects a gap between the supply and demand for new office space in Glasgow emerging in 2010 after the current wave of completions comes to an end. “This position is challenging but it's not desperate.”

While Edinburgh and Glasgow are starting to feel the effects of the credit crunch, things are different in Aberdeen. Although the price of crude oil has declined from this year's peaks, the office property market remains strong, driven by an underlying shortage of grade-A office space in the centre. New capacity has come onstream and been snapped up, and the top rent achieved has reached £30 per sq ft, putting Aberdeen ahead of Scotland‘s two leading cities.

Meanwhile a new arrival is emerging on the office property scene. Midway between Glasgow and Edinburgh, a new office development is being constructed close to the M8 motorway at Eurocentral, Scotland's European freight hub. The location is the former Chunghwa Picture Tubes plant, a big inward investment project of the 1990s which fell spectacularly short of expectations. In a £330m investment the developer Maxim Properties intends to create 756,000 sq ft of office accommodation in 10 high quality office buildings - the first of which will be finished in November with another due to be ready in December and others following during 2009. Maxim sees the project as serious competition to the office markets of Glasgow and Edinburgh.

Looking at the office market in Scotland as a whole, Alan Stewart, the property partner at the solicitors Maclay Murray & Spens, says:

“The reality is that we are moving into difficult and uncertain territory. The property market is not immune from the wider economic uncertainty. We will see some development activities slowed down.”