SCOTLAND’S two biggest cities risk becoming less attractive to companies looking to invest or expand existing sites because of a lack of Grade A offices under development, it has been warned.
Phil Reid, vice-chairman of the British Council of Offices (BCO) in Scotland, said the plunge in sterling since the Brexit vote has made Glasgow and Edinburgh more attractive to foreign investors looking for returns from existing commercial property.
But he warned that such investors are not interested in committing to capital to developing new buildings from scratch because of the risks involved.
In Glasgow, Mr Reid said there is “virtually no” new speculative office development projects at the construction stage. The last speculative developments to come on stream in Glasgow came around two years ago, he said, were the launch of St Vincent Plaza, 110 Queen Street and 1 West Regent Street.
Planning approval has been secured for what he termed two high-profile sites in Glasgow, but those projects remain on ice while funding is not forthcoming.
At the same time, existing offices are being converted for other uses, such as hotels, and student accommodation, putting a further squeeze on supply.
“The investment funds which have been flowing in are people looking to buy up and let investments and income streams, rather than take on the risk of speculative office development, no matter how strong the story is,” he said. “[It is] a different mandate for those investors.
“Other than pre-let ones to Morgan Stanley and Scottish Power, which were reasonably straightforward to fund in the investment market, the development risk money isn’t there at the moment. We all wait with bated breath for someone to take the plunge.”
Mr Reid, a self-employed property consultant, added: “If there is no new stock, inward investment will be harder to attract to the city.”
BCO recently commissioned a far-reaching study into the impact Brexit has had on the office market in cities around the UK, envisaging scenarios such as the effect a soft or hard exit from the European Union would have on the sector.
It revealed that a “latent” demand for up to two million square feet of office space in Glasgow, in light of growing employment forecast in sectors such as professional services and financial technology. This, the report signalled, has offset the gradual decline in traditional financial and insurance roles, prompted by factors such as branch closures and automation.
Mr Reid noted that major corporate tenants are now demanding office space of an increasingly high specification, with the highest standards energy efficiency, flexible working areas and facilities for staff cycling to work. However he warned that the dearth of new development projects may ultimately harm the attractiveness of Glasgow and Edinburgh.
“If a city can’t produce it, and the larger single floor plates that these occupiers like aren’t there, there is a strong risk that footloose investment, or growth of existing major companies can be moved off elsewhere because of the [lack of] availability [of offices],” he said. “Other cities could steal a march on Glasgow because of that.”
Mr Reid added: “It’s been quite well quoted in research papers that there has been high predominant purchases by foreign investors from all over the world, US money etcetera, direct and indirect, into property companies based in Scotland,” said Mr Reid. “The majority of those [investors] don’t want development risk, so speculative development is virtually non-existent in both Glasgow and Edinburgh.”
However, while concerned about the pipeline of new office development, Mr Reid insisted the aftermath of the Brexit vote has not been universal “doom and gloom” for the sector, though he expects the road ahead to be rocky.
The report acknowledges that, more than one-year since the Brexit vote, the uncertainty which has been caused by the decision is “feeding through to slower [economic] growth”.
“Indeed, there is an almost palpable sense that choppy waters lie ahead, particularly with regard to trade and movement of labour,” it adds. “Despite this, businesses continue to make long-term investments in the national economy. Even in the City, some large investment banks have committed to large new office buildings.”