Aberdeen property market set for declines unless oil price picks up

Aberdeen has seen some of the strongest growth in the residential real estate market in recent years but now it is under a period of adjustment after seven years of phenomenal growth, according to a new analysis.

The residential market across the Aberdeen area is being affected by uncertainty within the oil dependent local economy and prices have started falling, data for the third quarter of 2015 shows.

According to the report from real estate firm Savills in the 12 months to the end of September 2015 the overall average sale price in Aberdeenshire was the second highest in Scotland, behind Edinburgh. The average price in Aberdeen City was the fourth highest, behind East Renfrewshire, over the same period.

Indeed, data for the 10 year average for the overall residential market, values are 24% higher in Aberdeen City and 19% higher in Aberdeenshire, compared to 11% for Scotland as a whole.

Furthermore, prime values in the Aberdeen area are 34% higher than they were in 2007, the peak of the Scottish market. This compares to a drop of 22% for Scotland as a whole. Despite the recent turmoil, monthly residential rental prices in Aberdeen remain the highest in Scotland.

However, there was a fall of 2% in Aberdeen City and 4% in Aberdeenshire in mainstream prices during the third quarter of 2015, compared to the same period last year. Prime values in the Aberdeen area have dropped by 9% over the same period, with properties in rural locations most affected compared to city locations. Rental values in Aberdeen City dropped by 7% over the same period.

The biggest impact has been felt in the volume of sales. During the year ending September 2015, the number of residential sales in Aberdeen City and Aberdeenshire fell by 5% and 11% respectively, compared to the same period last year.

However, Faisal Choudhry, director of Savills Scottish research, pointed out that despite these drops, there are some sections of the market that have bucked the trend. These include properties between £300,000 to £400,000, which have seen a slight annual increase in sales of 5%.

‘Our analysis of new build developments shows an increase in the number of properties currently available between £200,000 and £300,000. This includes first time buyers, professionals and young families who are continuing to benefit from the comparatively lower rates of taxation and mortgages,’ he said.

He also pointed out that while as a whole the introduction of the new Land and Buildings Transaction Tax (LBBT) in April pushed the number of prime property sales up by 10% but this was not the case in the Aberdeen area, where the number of prime sales fell slightly to 669 during the year ending September 2015, compared to 678 during the previous 12 month period.

‘This suggests the market was further constrained by uncertainty within the oil sector.
Prime activity has been further compounded by higher levels of taxation as a result of LBTT, with the number of sales dropping by 44% to just 202 between May and September this year, compared to 362 over the same period last year,’ said Choudhry.

‘Unlike the rest of Scotland, the top end of the Aberdeen market above £750,000 has remained relatively active, particularly in recent months as it begins to adjust to the challenges of LBTT. This is especially true for hotspots such as Aberdeen's West End, where equity is driving this market,’ he explained.

‘There were 14 second hand sales above this level in the AB15 postcode hotspot between May and September this year, compared to 13 over the same period last year. There were five sales recorded above £1 million in the Aberdeen area during August and September this year, which was equal to the number over the same period last year,’ he added.

Looking ahead Savills says that if the oil prices remain subdued there is likely to be a 10% fall in prime property prices, a 3% fall in mainstream prices and a 4% fall in rental prices.

‘In the event of an increase in oil price, we will witness a quicker recovery in residential values over the next five years. Despite current challenges, the residential market is underpinned by a lack of supply in the city hotspots and this will help protect values in these established residential neighbourhoods,’ said Choudhry.

He explained that house builders in Aberdeen are approaching new land purchases with caution at the present time. ‘Unlike residential sales, the length of time taken to complete land transactions means the prices being recorded today bear little resemblance to what is actually occurring in the current market,’ he said.

‘The outlook for both sales prices and rates of sale for new homes is proving difficult to predict, and the risk to the house builder is therefore significantly increased. Whilst housebuilders will attempt to allow for incentives and future pricing when assessing land values, the best way to factor in the increased risk is to raise their profit margins,’ he added,

He also explained that while Aberdeen area regularly tops quality of life polls and further planned infrastructure improvements will enhance its reputation as an attractive location to live and work, prime values above £400,000 will need to reduce by 10% next year in order to restore normal trading conditions.

He concluded that developers will be looking to increase profit margins to guard against risk and this will negatively impact land values in the longer term.