ABERDEEN OFFICE MARKET REPORT SPRING 2018 - RESEARCH - Knight Frank
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RESEARCH ABERDEEN OFFICE MARKET REPORT SPRING 2018
ECONOMIC OVERVIEW
The Aberdeen economy enters 2018 with cause for
guarded optimism.
Oil is the city’s main growth driver, and course and the simulator show Aberdeen
in early March, Brent crude was trading is further expanding as a centre of
at around the US$64.00 a barrel mark, expertise for the oil industry, which allows
up by 16% on a year earlier. A recent the city to export specialist knowledge to
FEB 2016 poll of 37 oil market analysts conducted other global oil markets.
$36.63
by Reuters suggests that prices by
The city should also see reduced traffic
the end of the year are expected to be congestion, as the new £745 million
around the present level. Price stability
SEP 2017 Aberdeen Western Peripheral Route is
$52.74 would offer certainty to oil firms operating expected to open this year. Over the
Aberdeen’s £5m government in Aberdeen, and allow them to plan for medium to long-term, new investment
£350m harbour funding to find the future. This improves the chances will support the city’s leisure economy,
expansion set to potential new that companies with upcoming lease
create 2300 jobs deposits in the with plans for a new Aberdeen FC
North Sea expiries might initiate searches for new stadium, and the new £333m Aberdeen
office space. Exhibition and Conference Centre, which
OCT 2017 The uncertainty surrounding Brexit is scheduled to open next year.
$56.01
presents a significant headwind for the
North Sea hits WorleyParsons to UK economy. Oxford Economics are
ten year high for buy AFW UK Oil & FIGURE 1
new oil projects Gas for $303m forecasting UK GDP to expand by 1.5% Aberdeen office take-up and oil prices
in 2018, marginally down on the 1.7%
NOV 2017 figure recorded for 2017. 1,200 120
$60.43 Contrary to press reports, new economic 1,000 100
Scottish Oil & The Chancellor opportunities for Aberdeen are emerging,
Gas production announced a
increased by long-awaited tax particularly in regard to the task of 800 80
$ per barrel
000s sq ft
2.9% in 2017 break for the decommissioning the first generation of
North Sea oil and North Sea oil platforms. Construction 600 60
gas industry
has begun on the harbour extension 400 40
at Nigg Bay that will allow the city to
DEC 2017 claim a share of this new business. Also, 200 20
$63.61 the University of Aberdeen and Robert
Temporary closure Chrysaor agrees to Gordon University (RGU) are co-operating 0 0
of Forties oil and buy a basket of
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
gas pipeline pushes fields which account to offer the world’s first Masters degree
oil prices above for around half of in decommissioning, while RGU has built TAKE-UP (SQ FT) BRENT CRUDE OIL
$65 per barrel Shell’s North Sea PRICE (annual average)
production for up to a simulator to allow oil company workers
$3.8bn (£3bn) to practice well plugging. The degree Sources: Knight Frank Research / Thomson Reuters
JAN 2018
$66.60 FIGURE 2
BP announces two Serica plans 2017 take-up vs 10 year average
new discoveries in the expansion in
North Sea and plans Aberdeen after 100%
to boost production by BP deal
800,000 bpd 80%
by 2020 60%
40%
FEB 2018 20%
$69.71 0%
Golden Globe Shell to redevelop -20%
Merchants purchased Penguins field in
Statoil House, at the the North Sea -40%
Leeds
Cardiff
Birmingham
Edinburgh
Sheffield
London WE
Glasgow
Manchester
Bristol
London City
M25
Aberdeen
Newcastle
Prime Four Business
Park, for £18.7m
Source: Knight Frank Research
Spot price 1st of each month Source: Knight Frank Research Aberdeen 10-year average: 569,699 sq ft
2 Please refer to the important notice at the end of this reportOCCUPIER MARKET
With the worst of the Oil & Gas downturn now past and most rationalisation programs
seemingly complete, occupier activity showed steady improvement in 2017.
As with previous Oil & Gas cycles, once & Gas sector regarding contract wins and A combination of development
the oil price starts to increase and projects new exploration. completions and ‘grey space’ coming
are reviewed with the prospect of ramping back to market meant a further rise in
In terms of supply, levels have remained
up production again, this leads to new vacancy was recorded in 2017. Grade
at over 2.5 million sq ft over the course
employment, which in turn leads to new ‘A’ availability increased to 753,800 sq ft
of the year with no signs of this figure
requirements for office space. during the year, a total twice that of the
reducing significantly in the short term.
Office take-up reached 468,000 sq ft by City Centre offices continue to dominate long-term average. This is the highest
year end, a total that, although 18% below supply, accounting for 43% of the market level on record for the city, but this total,
the 10-year annual average, reflects a 68% allocation. Marischal Square was the should represent the peak in vacancy with
increase when compared to 2016. last of the new developments to reach the development pipeline consisting of
practical completion in December 2017. proposed schemes only at this time.
The reported rise was underpinned by
We are seeing healthy enquiry levels for
three large deals. The largest of which In 2017, prime headline rents held firm
Grade A city centre offices that will “soak
saw 138,500 sq ft taken by Total E&P at £32.00 per sq ft, albeit occupier
up” some of the new build and refurbished
UK at West Campus, Westhill. Although incentives remain particularly attractive.
stock. The bulk of the Grade ‘C’ space
agreement was reached in March 2017,
(over 558,000 sq. ft) is no longer “fit for Rental values are expected to come under
the energy firm only moved into
purpose” and should be considered for pressure in 2018 driven by a continued
the property in Q4 2017 following
re-development or alternative use. supply and demand imbalance.
refurbishment of the building.
The second largest letting saw Somebody
Cares relocate to another large secondary
office in Aberdeen. The charity agreed
terms on a new lease of 51,000 sq ft at
John Wood House.
In May, Chrysaor Holdings Limited, took
over 47,700 sq ft at The Capitol on Union
Street for their North Sea Operations HQ.
Since opening in 2016, 85% of available
space has now been let in the £30m award
winning redevelopment of the former
cinema. Other tenants in the building
include Price Waterhouse Coopers (PWC)
and Dentons UKMEA LLP.
Many occupiers took advantage of
“the tenant friendly” market conditions
throughout 2017 to re-negotiate the terms
of their existing lease with their landlords
(nervous about potential long void periods The Capitol
and large empty rates bills) on more
favourable terms in return for extending
or renewing their lease duration after first TABLE 1 Key office transactions in 2017
circulating requirements in order to “test
the market”. This lead to a number of Address Tenant Size Rent
requirements being later withdrawn from (Sq ft) (£ per sq ft)
the market. Office & Leisure Building, West Campus, Total 138,535 £21.00
The number of active requirements at Arnhall Business Park, Westhill
the end of 2017 stood at 50, although John Wood House Somebody Cares 51,153 Nominal rent
the vast majority (39) of these were for
sub 5,000 sq ft. However, we have seen The Capitol, Union Street Chrysaor Holdings Ltd 47,657 £32.00
a small number of larger requirements 395 King street TuaRx Therapeutics Ltd 12,386 All-inclusive rent
of 10,000 sq ft and above return to H1, Hill of Rubislaw Siccar Point Energy Ltd 7,730 £23.00
the market following recent positive
announcements from operators in the Oil Source: Knight Frank Research
3ABERDEEN OFFICE MARKET REPORT SPRING 2018 RESEARCH
INVESTMENT MARKET
Following a subdued market in 2016, the gap between buyer and seller
expectations finally began to close in 2017. Office investment volumes for the year
were £98.8m, the highest total achieved since 2014.
In the run up to the ‘snap’ general pre-let agreed prior to the oil price expected to remain stable in the coming
election in June the market contended crash in 2014. This was the 105,594 12 months
with what has unfortunately become sq ft office let on a 15 year lease to
Secondary pricing on the other hand
normal political uncertainty. However Lloyds Register by developer Drum
is highly variable. As buyer and sellers
with the possibility of a second Scottish Property Group at Prime Four Business
Independence Referendum having Park. This sale, together with the expectations began to converge, we
abated there have been notable signs of subsequent sale in January 2018 of the did see a limited number of transactions
increased confidence in the market and Statoil office (also 15-year lease) at Prime with short to medium term income take
investor sentiment towards Scotland Four has shown the continued success place. The purchases by FCFM Group
as a whole. The most tangible signs of the Park to attract investors and the of Quattro House and Trafalgar
have generally been in the Central Belt, demand for well-let high quality stock. House, both in Altens, showed the
however during M&G’s sale of the The last six months have also seen two true differential in pricing for some
West Campus at Westhill, we saw the of the largest property investments for assets, which had short/medium term
price quoted for the asset increase as Aberdeen come back to the market – the income and tenants not in situ. Over the
a direct result of the election result as Aker HQ, Dyce for £114.9m (6.75%) and longer term, the removal of a number
UK Funds increased their valuations of City Park (Sir Ian Wood House), Altens for of secondary office buildings from the
Scottish assets. The investment was £81.20m (6.75%). market can help occupancy rates and
originally marketed for £38.75m (8.01%) market recovery. The sale of Denburn
Prime office yields remained at 6.50% in
in March and sold in November for House on Union Terrace within the
2017, meaning prime assets in Aberdeen
£39.38m (7.88%) with an unexpired term City Centre for conversion to a hotel /
still offer a considerable discount when
of 11 years. aparthotel is one of the early examples
compared to other regional centres.
The Aberdeen market did witness an Notably, at this level, yields are 100 of such with an expectation that as
increase of 419% when compared to the basis points above the market peak of sellers reduce their price expectations
cycle low of 2016, albeit it was propped 5.50% recorded in 2007. Despite some further redevelopment of offices will
up by one sale, which was driven from a improvement in sentiment, pricing is become viable.
TABLE 2 FIGURE 3
Key office investment transactions in 2017 Aberdeen offices investment volumes
600 50
Address Size Price Net initial Purchaser
(Sq ft) (£m) yield (%)
500
40
Lloyds Register, Prime 105,594 £41.28m 6.68% LCN Purchasers
Four, Kingswells 400
30
West Campus, Westhill 211,773 £39.38m 7.88% Gulf Islamic
£m
300
%
(113,951 office) Investments (GUI)
20
200
Quattro House, Altens 44,996 £7.70m 12.22% FCFM Group
100 10
Ensco House, Gateway 25,802 £6.5m 7.34% Private Investor
Business Park
0
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Trafalgar House 1&2, Altens 95,661 £4.00m 30.48% FCFM Group
£M % OF SCOTLAND TOTAL
Source: Knight Frank Research Source: Knight Frank Research/Property Data
4ABERDEEN OFFICE MARKET REPORT SPRING 2018 RESEARCH
West Campus, Westhill was the subject of the largest letting and second largest sale of 2017
KNIGHT FRANK VIEW
Occupier market “buying” opportunity. Trend for the addition to signs of an improving
• Sentiment in the industry is year is likely to be a continued interest occupier market, is slowly beginning
cautiously optimistic, however by occupiers in new space in the to fuel renewed investor interest.
despite the oil price reaching a high City Centre.
• Despite an upturn in sentiment by
of $67.00 per barrel at the close of • The bulk of the Grade ‘C’ space is no UK Funds to Scotland, we expect
December 2017, there will inevitably longer “fit for purpose” and should overseas investors to continue to
be a significant time lag before we be considered for re-development or
witness a tangible improvement in dominate the market.
alternative use.
the occupational market. • As the market begins to recover,
• Early indications for 2018 are we would expect to see greater
Investment market numbers of investments traded
encouraging with many occupiers
seeing the current imbalance of The offer of favourable pricing when
• compared to the past couple
supply over demand being a great compared to regional competitors, in of years.
5RESEARCH
Lee Elliott Partner
Head of Commercial Research
+44 20 7861 5008
lee.elliott@knightfrank.com
Darren Mansfield Associate
+44 20 7861 1246
darren.mansfield@knightfrank.com
ABERDEEN
Eric Shearer Partner
Development & Investment
+44 1224 415 948
eric.shearer@knightfrank.com
Matthew Park, Senior Surveyor
Disposals & Acquisition
+44 1224 415 951
matthew.park@knightfrank.com
Chris Ion Partner
Investment, Disposals & Acquisitions
+44 1224 415 969
chris.ion@knightfrank.com
Richard Evans Partner
Valuations & Lease Advisory
+44 1224 415 952
richard.evans@knightfrank.com
Grant Hendry Associate
Building Consultancy
+44 1224 415 963
grant.hendry@knightfrank.com
Malcolm Campbell Associate
Planning
+44 1224 415 949
malcolm.campbell@knightfrank.com
Fiona Alsop Associate
Management
+44 1224 415 944
fiona.alsop@knightfrank.com
Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide
range of clients worldwide including developers, investors, funding organisations, corporate
institutions and the public sector. All our clients recognise the need for expert independent
advice customised to their specific needs.
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RESEARCH
of the information, analysis, views and projections presented
in this report, no responsibility or liability whatsoever can
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