Scottish commercial property price growth is expected to “moderate” to 9.6% in 2022 and 6.4% in 2023, as rental expansion slows and yields stabilise.
International property firm Colliers explained that this follows a six year high of 16.5% in 2021, with the industrial sector, retail warehousing, prime offices and life sciences all remaining popular with investors.
It is predicting that all market segments will record positive total returns growth in 2022, led by industrial at 13.2% growth.
In Scotland, retail investment reached a three-year high of £530m in 2021, helped by a strong fourth quarter, during which £210m was transacted.
Colliers is expecting this year's tourism volumes to slowly return to “more normal” levels, supporting high street shopping, although falling real household incomes and declining consumer confidence will continue to put pressure on retailers.
Further rental falls across most UK retail segments are also forecast over the next two years, before an eventual return to growth in 2024.
Despite significant rental declines, the firm believes that the pricing correction of the past few years has come to an end. All retail yields in Scotland 'hardened' in 2021 and at the end of the year were at 6.98%, down by 0.84% since the end of 2020.
Colliers’ forecasted the UK retail yield will move by 0.19% this year. Yield compression is driving total returns growth of 8.7% for all retail this year, with warehouses set to perform particularly well.
Meanwhile, annual investment sales volumes in the Scottish office sector reached £640m in 2021, up on the £380m transacted in 2020, but still around 5% below the 10-year average of £68m.
Investor demand for prime assets remains strong, with further mild yield compression expected this year. Both Glasgow and Edinburgh have recorded improved take-up levels and Aberdeen is one of the front runners in North Sea oil firm Repsol Sinopec’s search for up to 75,000 sq ft of office space.
If the company goes ahead, this would be the second significant leasing deal of an oil and gas company in the city, after Shell took 71,000 sq ft at Silver Fin Building earlier in 2021.
A more detailed analysis suggests that office assets in Edinburgh and Glasgow will continue to offer investors good value. Historically, average office yields in these two cities are around 100bps higher than the UK average
Colliers' analysis showed that around £340m was transacted in the industrial sector in 2021, up from the £220m seen in 2020 and almost twice as much as the 10-year average of £230m.
Given the continuous demand for space across the UK, supply is likely to remain constrained for at least the next 12 to 15 months.
Colliers forecast all industrial yields will fall to 4.04% by the end of 2022, a further 0.18% lower than at the end of 2021, with stabilisation in 2022 and a "very mild" outward shift thereafter.
Douglas McPhail, head of Scotland at Colliers, commented: “We continue to see considerable investor demand for offices in Scotland, especially in Edinburgh where we have witnessed strong prices being paid.
“Looking across the commercial property spectrum, pricing remains firm with yield compression expected across most market sectors this year - we are also expecting investment volumes to break through the £2bn mark in 2022 as appetite remains strong and there are still opportunities for strong returns.”
Elliot Cassels, in the national capital markets team at Colliers Scotland, added: “The rise in e-commerce and the effects of Covid has accelerated the structural change in demand for warehousing.
“The increased tenant demand and strong rental growth has resulted in industrial and distribution remaining the best performing sector in the Scottish property market and the rest of the UK attracting strong investor demand from both domestic and overseas capital - however, the Scottish market has limited prime stock and subsequently the market has been starved of product.”
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