Scottish commercial property performance slowing as foreign investors sell

Total returns fell to 2.8% with capital growth of 1.3%; down from total returns of 5.5% in the first three months of the year, according to the second quarter review from international property consultants CB Richard Ellis.
 
This slowdown is in line with the wider UK trend, which saw total returns of 3.5% following a 6% return in the first quarter, the report says.
 
It points out that yield impact remains the predominant driver of capital growth, with the equivalent yield falling by17bp to 7.6%. On an annual basis, total returns were 22.4%, with capital values up by 14.6%.
 
‘This annual performance reflects four strong quarters of growth for property. However, Scottish property continues to under perform the wider UK, which saw total returns of 24.7% over the year and values rise16.6%,’ the report says.
 
Rental values fell by 0.6% in the second quarter of 2010, an improvement on the fall of 0.8% in the first quarter and over the year, Scottish rental values have fallen by 3%.
 
Retail was the strongest performing sector for the fourth consecutive quarter, surpassing the other two sectors recording a total return of 2.8% and capital growth of 1.3%.
 
‘This outperformance was due to strong high street shop returns. High street shops saw capital growth of 1.8%, with total returns of 3.1%. Whilst this represented a marked slowdown from the previous quarter, the slowdown wasn’t as large as seen in the retail warehouse sector, which saw total returns fall from7.4% in the first quarter to2.6% in the second quarter,’ the report says.
 
Scottish retail rental declines continued in the second quarter, falling by 0.7%. This was a slowdown from the 1.1% fall seen in the first quarter. Over the year rental values have fallen 3.6%.
 
Scottish office performance weakened the most significantly of all the sectors in the second three months of the year with capital growth of just1% and total returns of 2.2%. ‘This was due to an easing in the downward pressure on yields, which fell just 20 bp over the quarter. On an annual basis, capital values have risen11.4% with total returns of 19.0% compared with the wider UK market which saw annual capital growth of14.8% and total returns of 22.7%,’ the report explains.
 
After rental values appeared to stabilise in the first quarter, the Scottish office market saw a further contraction of 0.8% in the second quarter, perhaps signalling ongoing weakness in occupier demand.
 
After under performing through much of the upturn, Scottish industrials showed greater resilience this quarter, with total returns of 2.6% and capital growth of 0.8%. On an annual basis, Scottish industrials recorded total returns of 17.1% and capital growth of 7.9%, under performing the wider UK property market.
 
Rental values fell by just 0.2% in the second quarter, less than the 0.7% decline in the previous quarter. And over the year, rental values have fallen0.5%.
 
Across the UK, investment totals picked up considerably in the second quarter, with around £8.5 billion transacted, up around 40% on the first quarter. However, in Scotland the investment markets saw only an 8% pick up in transaction volumes, taking the second quarter figure to £350 million.
 
According to Property Data £670 million of Scottish property was transacted in the first half of the year, compared with £290 million in the same period last year, a distinct pick-up.
 
In net terms, UK institutions remain the leading buyers of Scottish property, with a small net gain of £20 million in the second quarter. ‘However it was the reduction in foreign investment which was most notable in the second quarter, with the first net sell off since the third quarter of 2008,’ the report says.