Knight Frank - General - Aberdeen,

Date: 25 Feb 2010

Aberdeen economy set to develop at a rate faster than Scotland's.

Aberdeen's economy is predicted to experience faster growth than Scotland's as a whole, increasing by an estimated 9.6 per cent over the next five years, according to a report compiled by global property consultancy, Knight Frank.

Aberdeen's economy is predicted to increase by an average of 1.9 per cent per annum until 2014, compared with an anticipated 1.6 per cent increase for the nation's economy according to Experian Business Strategies.

The figures, revealed in Knight Frank's 2010 Aberdeen Office Market Activity Report launched today, (Thursday 25 February 2010) exclude the economic contribution made by offshore oil and gas extraction and highlight that the city is holding up against other regional markets.

Despite the current economic downturn, green shoots of recovery are visible, with office letting activity remaining stable in Aberdeen and prime headline office rents being reconfirmed at £30.00 per sq ft by Carlton Rock's letting of 28 Albyn Place to BG Group in May 2009. Furthermore, the discount from headline to net effective rents, which is an average of 20 per cent in other regional markets across the UK, equates to only 5 five per cent in Aberdeen city centre.

The slump in the property market has been evident in Aberdeen throughout 2009, with only four transactions in excess of 10,000 sq ft completed, and activity focused instead on smaller office units. Consequently annual take-up was just 262,400 sq ft - 30 per cent below the city's medium-term average.

The volume of developments completed in Aberdeen has impacted on the overall supply of office space, with around 656,000 sq ft available at the end of 2009. The majority of available office space is in out-of-town locations such as Westhill, Dyce, Bridge of Don and Tullos, resulting in a substantial oversupply in Aberdeen's out-of-town markets.

As lending from banks remains restricted, most proposed developments in Aberdeen have been put on hold and nearly all are reliant on securing a pre-let. At present, there is more than 1.5 million sq ft of office schemes in the development pipeline but only three developments are under construction.

This includes City Wharf which is expected to be the first to complete, delivering 27,785 sq ft of new office space to the market in Spring 2010. Hazledene's 125,000 sq ft IQ scheme at Justice Mill Lane is also scheduled to conclude this year and Aberdeen City Council's substantial 180,000 sq ft redevelopment of Marischal College is anticipated for Easter 2011.

The report also identifies that investment transaction volumes have been low in the last year and activity remains highly selective. However, the sale of BBC Scotland's premises at a net initial yield of 6.47 per cent indicates that prime office yields have moved in notably in recent months, and are currently estimated at 6.25 per cent.

Highlights of the report include:

Aberdeen's office market saw very low levels of occupational activity in 2009, with only four transactions in excess of 10,000 sq ft. Annual take-up was just 262,400 sq ft, 30 per cent below the city's medium-term average
The city's prime headline office rent has been reconfirmed at £30.00 per sq ft and the discount from headline to net effective rents, which is an average of 20 per cent in other regional markets, equates to only 5 per cent in Aberdeen city centre
There is 1.5 million sq ft of office schemes in the pipeline with almost 50 per cent located out of town
The average capital value in 2009 dropped further from its 2008 level of £249 per sq ft to £190 per sq ft. This reflects the dual impact on Aberdeen of the decline in oil prices during late 2008 and early 2009, combined with the wider economic and property recession. The key restraint on activity is the lack of stock available to purchase in Aberdeen

Katherine Monro, partner, Knight Frank in Aberdeen said: "We have seen a positive start to the year with a substantial rise in city centre enquiries. With more newly refurbished space due to be released onto the market in 2010, I would expect prime headline rents to remain at £30 per sq ft.

"As all pipeline schemes require a pre-let, once Hazledene's IQ scheme is complete there will be a shortage of new space within the city centre. However, this isn't the case for out-of-town markets which will remain over-supplied and these developments will continue to struggle to attract and retain occupiers throughout 2010."

Claire Higgins, head of commercial research, Knight Frank said: "Once again, Knight Frank's Aberdeen Office Market Activity Report highlights the continued relative strength of the city's economy and while Aberdeen has not been immune from the economic recession, its position at the centre of Europe's oil and gas industry has left it in a stronger position than many other UK regional markets.

"We expect prime office properties in Aberdeen city centre to continue to attract strong competitive interest from investors. Indeed it is now the lack of supply of such product, rather than a lack of demand, which is the key restraint on the Aberdeen market."

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