The Lambert Smith Hampton Scotland team: Ewen White Director, Capital Markets +44 (0)

Transcription

1

2 The Lambert Smith Hampton Scotland team: Aasia Mohammad Director, Business Space +44 () Ian Davidson Director, Business Space +44 () Ewen White Director, Capital Markets +44 () Andrew Shiells Director, Capital Markets +44 ()

3 WELCOME AASIA MOHAMMAD Director of Business Space Scotland The general election result from June 217, whilst problematic for many parts of the UK, was a significant moment for Scotland. It saw the chances of another independence referendum greatly diminish and has arguably provided a boost to business confidence across the country. This has improved sentiment amongst business and investors in recent months, encouraging activity in both the office leasing and investment markets. Investment activity in the first half of 217 has seen a vast improvement following a rather subdued second half of 216. This is an example of a market regaining balance after the turbulence resulting from the political situation. Each of the key Scottish markets has seen sizeable assets change hands during 217 with Glasgow currently leading ahead of the other cities in terms of investment volume. Whilst there is a healthy outlook for further investment activity with investor sentiment growing, the main challenge moving forward, is the supply of good quality stock to satisfy such appetite. Across most of Scotland s key occupational markets, there has been an obvious improvement in activity compared with 216. Aberdeen and Edinburgh take-up is forecast to increase significantly from 216 with activity in Glasgow city centre to remain steady and in line with the 1-year average. Whilst there is a lack of any new grade A speculative development, there is the prospect to move on rents within refurbished second hand stock. With these opportunities in mind, a forensic understanding of the market remains critical. This report contains an overview of the office sector in our region and granular detail of the key locations. Being able to look at the past is valuable, but understanding the present and capitalising on the future is where we will see success. If you would like any guidance or further information, please contact our team of experts we d be delighted to help. Best wishes, Aasia Mohammad Head of Business Space, Glasgow CONTENTS MARKET INSIGHT 6 Occupier market overview 1 Investment market review 12 Tracking demand 14 Life sciences business space 16 Your energy action plan REGIONAL OVERVIEW 2 Aberdeen 22 Edinburgh city centre 24 Edinburgh out-of-town 26 Glasgow city centre 28 Glasgow out-of-town Scotland Office Market Report 217 3

4 MARKET INSIGHT 4 Lambert Smith Hampton

5 Scotland Office Market Report 217 5

6 OCCUPIER MARKET OVERVIEW POLITICAL UNCERTAINTY DISSIPATES The general election result from June 217, while problematic for many parts of the UK, was a watershed moment for Scotland with significant losses for the Scottish National Party and clear support for pro-union parties amongst the Scottish electorate. This has been a shot in the arm for occupiers and investors in Scotland. Following the Scottish referendum on independence in 214, there was a long-lasting wave of negative market sentiment in Scotland, with increased political uncertainty leading to a perception of risk amongst both occupiers and investors. The general election result, and post-election shelving of a second referendum on Scottish independence, has boosted sentiment amongst businesses and investors in recent months and in turn enhanced activity in both office leasing and investment markets. We forecast that even greater improvements in activity will occur in 218. Encouragingly, the recent alleviation of market uncertainty is also set to coincide with a marked spike in lease event activity in 218. Across the five key markets combined, the year will see 145 lease expiries and breaks above 5, sq ft, amounting to just over 2.1m sq ft of potential demand. ACTIVITY PICKS UP IN 217 Across the Scottish locations, activity in the office market has been healthy. Take-up in Q2 is expected to be 58% higher than in Q1, with four of the five locations recording an increase during this period. While take-up in Aberdeen in Q2 is unlikely to exceed Q1, if so, this will be the result of one large transaction in Q1 and not a lack of activity in Q2. There has been a tangible improvement in activity in most of Scotland s key markets compared with 216. Indeed, with the exception of Aberdeen, take-up in 217 is expected to surpass the 1-year average in all cases. Activity in the previous 12 months has been spurred on by three very large deals which together accounted for 19% of total take-up. Glasgow was home to the largest deal with the University of West Scotland s 225, sq ft lease at the Eco Campus. In Edinburgh, the Government Property Unit pre-let 181,37 sq ft at New Waverley while, in Aberdeen, Total relocated to a 13, sq ft property at Tarland Road, Westhill. Aberdeen and Edinburgh take-up is forecast to increase significantly from 216, with activity in Glasgow city centre to remain steady. While take-up in the out-of-town Glasgow market will be healthy for 217, it will be down considerably on the record level seen in take-up forecast ( sq ft) Aberdeen Edinburgh city centre Edinburgh out-of-town Glasgow city centre Glasgow out-of-town H1 217 H2 forecast 1-year average 6 Lambert Smith Hampton

7 ABERDEEN PRIME HEADLINE RENT 32. PER SQ FT FORECAST GROWTH BY END 218 STOCK SQ FT % 9.9m 6.5% PRIME YIELD GLASGOW OOT PRIME HEADLINE RENT 14.5 PER SQ FT % FORECAST GROWTH BY END 218 STOCK SQ FT1.5m 7.% PRIME YIELD EDINBURGH OOT PRIME HEADLINE RENT 2. PER SQ FT FORECAST GROWTH BY END 218 1% STOCK SQ FT1.3m 6.25% PRIME YIELD GLASGOW CC PRIME HEADLINE RENT 3. PER SQ FT FORECAST GROWTH BY END 218 % STOCK SQ FT15.7m 5.75% PRIME EDINBURGH CC PRIME HEADLINE RENT 33.5 PER SQ FT FORECAST GROWTH BY END 218 3% YIELD STOCK SQ FT1.7m 5.25% PRIME YIELD Source: LSH Research Scotland Office Market Report 217 7

8 OCCUPIER MARKET OVERVIEW SPECULATIVE DEVELOPMENT REMAINS ELUSIVE Across all key locations, healthy demand exists from both occupiers and investors for quality space. New development, however, remains elusive with less than 1m sq ft of new build office space currently under construction in Scotland. The majority of new developments continue to be either new purpose-built schemes or initiated by pre-let commitments. Significant pre-let developments currently under construction include St Andrew s Square in Edinburgh (11, sq ft) fully let to Standard Life Investments, and Bothwell Exchange in Glasgow (15, sq ft) fully let to Morgan Stanley. While speculative development is currently atypical and funding for these schemes more difficult to secure, the recent examples of speculative development in Aberdeen show that where it occurs, tenants will follow. Due to complete this year, the Marischal Square development recently secured a letting with Aberdeen Journals and the Silver Fin building with Orega. While space is still available in these developments, occupier appetite exists. AMPLE SUPPLY BUT GRADE A SHORTAGE Availability in the Scottish markets reached a peak of over 8m sq ft during 216. At the end of H1 217, availability had fallen marginally to circa 7.8m sq ft. Based on average take-up rates, there is at least three years of supply in the key markets, with the one clear exception being Edinburgh city centre, where supply equates to only 1.6 years. While overall supply appears ample, there is an acute lack of grade A stock in particular locations. In outof-town Edinburgh and Glasgow city centre, grade A stock is almost completely absent, accounting for only 2% and 4% of total availability respectively. In the Glasgow out-of-town market, grade A availability currently stands at just under 1m sq ft, or 36% of total supply. While this seems sufficient, all of it is located in Maxim Office Park meaning that potential occupiers face a very limited choice of high quality space in this market. This shortage of high quality space and speculative development provides an opportunity for landlords to refurbish and reposition existing space, providing a timely solution to the need for modern office space that pre-letting speculative developments cannot compete with. Scotland availability (s sq ft) H Lambert Smith Hampton

9 DISTINCTIVE TENANT PROFILES Despite their relative proximity, the respective tenant profiles of Edinburgh and Glasgow are quite distinct. The capital city, Edinburgh, is traditionally characterised by central government and professional services companies. By comparison, Glasgow has a much more diverse base of occupiers. During the last 12 months, central government and professional services tenants accounted for over 5% of overall take-up in Edinburgh city centre, with notable deals including the Government Property Unit, Valad and EY. By contrast, Glasgow city centre take-up in the last 12 months reflected the greater diversity across sectors. While, professional services were most active, there was healthy activity from the construction and engineering sector and the retail, distribution and transport sector. Availability as years of supply* Glasgow out-of-town Aberdeen SIGNS OF LIFE RETURNING TO ABERDEEN As the European capital of the oil and gas industry, the occupier profile in Aberdeen is heavily weighted by energy and utilities occupiers. In recent years, Aberdeen had suffered a downturn in office demand and investment activity, related to the significant decline in the price of oil. There is general concensus in the wider industry that oil prices have bottomed out and benchmark oil prices have started to rise again, albeit slowly. Combined with the weak sterling rate, the Aberdeen office market has been buoyed and is showing signs of recovery, resulting in cautious optimism amongst occupiers, landlords and investors. GROWTH PROSPECTS CONSTRAINED BY LACK OF SUPPLY With the exception of Aberdeen, prime headline rents increased in all markets during the first half 217. However, our forecasts indicate that this rental growth will be more subdued to the end of 217 and into 218, largely due to the lack of speculative development to drive rents upwards. Whilst we expect that rental growth will be subdued overall, we anticipate that incentive packages will tighten in the near term. The demand-supply dynamics in Scotland currently favour the landlord, with increases in demand reported for high quality properties and significant opportunity for landlords to add value to property through repositioning. Glasgow city centre Edinburgh out-of-town Edinburgh city centre * Years of supply defined as current availability divided by 1-year average take-up **Grade A includes speculative space completing in next 12 months Share of grade A** Share of grade B/C Scotland market average Source: LSH Research Scotland Office Market Report 217 9

10 INVESTMENT MARKET REVIEW Following a particularly subdued year in 216, the receding perception of political risk stemming from June s general election has stimulated a tangible improvement in investor demand for Scottish offices over recent months. INVESTMENT ACTIVITY BACK ON TRACK Following a very subdued period in 216, investment volume in the first half of 217 reached 271m, a tangible improvement at 47% above H To date, total investment volume during 217 currently stands at circa 6m, with the annual forecast set to exceed the 1-year average of 646m. This improvement in activity after a subdued second half of 216 is indicative of a market that is regaining balance after the turbulence resulting from the Scottish independence and Brexit referendums, and the snap general election earlier this year. Each of the key Scottish markets have seen sizeable assets change hands during 217. In Edinburgh, 1 Exchange Place was purchased by GLL Real Estate Partners for 47m. In Glasgow, 6 York Street was purchased by Wirefox Investments Ltd for 43.5m, and, in Aberdeen, Prime Four Business Park was purchased by LCN Capital Partners for 41.3m. THE SCOTTISH DISCOUNT ATTRACTS CAPITAL Compared with London and most regions of the UK, Scottish office investments currently offer much better value with significant long-term yield discounts compared with equivalent stock south of the border. Overseas investors recognise the value of Scottish locations. They are becoming more mature in their investment criteria in a UK context, with enquiries regarding key Scottish locations on the rise. While activity fell by 59% in the 12 months post- Brexit, overseas investors remain the dominant investor group by volume over the past 12 months, purchasing 214m of office assets in Scotland. During the post-referendum months, UK institutions were very inactive in the Scottish office market, recording just 3.5m of transactional activity, down 83% on their annual average. The only notable deal was Aberdeen Asset Management s purchase of 2 Brandon Street for 24m (NIY 5.65%). More recently, however, UK institutions have turned their attention back to Scotland and we expect competition for prime assets to intensify as the institutions compete with the overseas market. Scotland office investment volume ( m) Scotland office initial yield discount (basis points) H1 212 H2 212 H1 213 H2 213 H1 214 H2 214 H1 215 H2 215 H1 216 H2 216 H1 217 H2 217 F -15 London West End London City London Midtown North West West Midlands South West South East North East Eastern Yorkshire & Humber Wales East Midlands Aberdeen Edinburgh Glasgow Half-year average Average discount (1 years) Current discount (Q2 217) 1 Lambert Smith Hampton

11 GLASGOW IS ON TOP IN 217 In Scotland there is no pattern of a single location where the vast majority of investment is consistently directed, and a single large deal can launch a location into the top spot. Over the past ten years there has been a balance amongst Aberdeen, Edinburgh and Glasgow s claim to the top spot, and in the past three years each location has led once. To date in 217, Glasgow is leagues ahead of the other cities with volume of 419.8m, considerably boosted by a significant off-market deal. By contrast, Edinburgh s running total is 124.7m and Aberdeen s is 45.3m. REALISTIC PRICING IS KEY After the Brexit referendum the office investment market was subject to an adjustment in pricing. While prime well-let assets remained more resilient, it was poorer quality stock that was most affected by pricing adjustments and the investor flight to quality. Market activity is increasing in fluidity as both sellers' and buyers' expectations are converging. For large-lot size investments, there is keen interest from buyers when the price is right and more competition for institutional-quality stock. Secondary investments are also showing signs of recovery, attracting attention from opportunistic investors who are keen to add value through asset repositioning / refurbishment. Encouragingly, significant transactions have occurred during 217, helped by realistic pricing and the interest from overseas investors looking to capitalise on the weak value of sterling. A VARIABLE PICTURE FOR PRIME YIELDS Prime yields in Glasgow city centre hardened during Q2 217, reducing the discount with Edinburgh from 5 bps to 25 bps. It is likely that the yield compression in Glasgow may have been related to the shelving of a second Scottish independence referendum. The absence of a similar change in Edinburgh was likely due to the already keen prime yield at 5.5%. The difference in the key out-of-town markets is wider than the city centres, with Glasgow out-of-town offering a 75 bps discount compared with Edinburgh. With the fall in oil prices over the last few years, prime office yields in Aberdeen moved out as investor caution increased. With the recent bottoming out of oil prices and a pick-up in leasing and investment activity, prime yields are expected to compress. Although the wider market conditions of a possible interest rate rise and ongoing Brexit negotiations may slow this compression. OUTLOOK The perception of risk in the market is beginning to dissipate with distance from recent political events and the significantly reduced likelihood of a second Scottish independence referendum. The low interest rate and discounted yield environment offers the potential for investors to reposition secondary office stock for the best return prospects. With office investment activity and investor sentiment improving the outlook for Scotland is positive. The cost of investment in London has spurred overseas and institutional investors to consider alternative locations. Scotland offers good value and significantly discounted yields which is key to current demand. Within the key locations speculative development is scarce with developers experiencing issues securing speculative funding, and therefore most new developments are breaking ground only with significant pre-let commitment. For more information, please contact: Scotland office volume by buyer type ( m) Average lot size by location (27 to 217, m) Ewen White Director, Capital Markets +44 () ewhite@lsh.co.uk 5 5 Overseas investors Private propcos Private investors 12 months to Jun 17 Institutions Other/ undisclosed Quoted companies Annual average Aberdeen Edinburgh Mean lot size (ten years) Glasgow Median lot size Andrew Shiells Director, Capital Markets +44 () ashiells@lsh.co.uk Source: LSH Research Scotland Office Market Report

12 TRACKING DEMAND Relocation Triggers & Drivers What has motivated businesses to acquire new office space in Scotland and what influences their choice of property? Our analysis of transactions above 5, sq ft over the past 12 months reveals contrasting patterns between the key markets. TRIGGERS WHAT IS PROMPTING RELOCATION? For over half of occupiers in the key Scottish locations (57%), relocation was more likely to be prompted by a lease event, a pattern that underlines the importance of churn in each of the markets over inward investment. Notable transactions triggered by lease events included State Street Bank and Trust Company (65,628 sq ft at Lauriston Place, Edinburgh), the Scottish Prison Service (51,9 sq ft at Redheughs Rigg, Edinburgh) and Balfour Beatty (43,568 sq ft at Maxim 7, Glasgow). Positively, expansion was the trigger for 26% of relocations, indicating ongoing confidence among occupiers despite the recent political turmoil. Expansion also played a part in a number of deals in Aberdeen despite the collapse in oil prices, albeit none of these involved occupiers in the energy sector. Key deals spurred by expansion included the University of West Scotland (225, sq ft), Computershare (41,395 sq ft) and the Student Loans Company (4,853 sq ft). Common among these occupiers was a desire for better quality space or a more efficient working environment. DRIVERS WHAT DETERMINES END CHOICE? Over the 12 month period, a key factor determining choice of new premises was location, with 53% of occupiers reporting this as the primary driver. However, variation was evident between markets. In Edinburgh city centre, location was behind the vast majority of property choices. In Glasgow city centre location accounted for less than half of deals. In some instances, occupiers were able to remain in situ. For example, Wescot Credit Services acquired an additional 1,567 sq ft at 38 Cadogan Street, Glasgow while Actavo acquired a further 1,685 sq ft at Alexandra Parade, Citypark, Glasgow. Improvement in work space was cited as the key driver of choice in 14% of deals, a notable example being Mott MacDonald s acquisition of 34,515 sq ft of grade A space at St Vincent Plaza in Glasgow. Improved efficiency was the key driver of choice for 12% of deals, the largest being ST Microelectronics acquisition of 21,53 sq ft of grade A space at Tanfield, Edinburgh. Office move triggers (past 12 months) Office choice drivers (past 12 months) Lease event Expansion Location Property betterment Corporate activity Consolidation Cost Efficiency Specific physical need 12 Lambert Smith Hampton

13 Looking ahead While June s general election result provided little comfort for much of the UK s business community, the greatly diminished chances of another independence referendum have arguably provided a boost to business confidence in Scotland. With lease events providing a key trigger to activity, here we assess the potential demand this could generate over the coming years. 218 COULD BE A BUSY YEAR Between the middle of 217 and the end of 22, Scotland s five principal markets possess almost 45 known lease events in excess of 5, sq ft. With the possible exception of Aberdeen, the quantum of forthcoming lease events is running considerably ahead of pipeline development, including both new-build schemes and refurbishments. While healthy take-up in the first half of 217 has been gilded somewhat by three major deals, evidence suggests that 218 will see an improvement in activity. The year will see 145 lease expiries and breaks above 5, sq ft across the five key markets, amounting to just over 2.1m sq ft of potential demand. Naturally, a significant proportion of lease events do not result in a relocation, but it is nonetheless an essential trigger of demand. The risk is that, without the appropriate supply in place to attract this latent demand, occupiers will have little choice but to stay in situ. GLASGOW LEADS THE WAY There is a degree of variation between the markets. Placed into context with stock levels, Glasgow s out-of-town market stands ahead of the others, with all known lease events between 218 and 22 inclusive equivalent to 22% of its stock. While this market is geographically disparate, it nevertheless bodes well for the letting prospects of the existing available grade A space in this market. The positive outlook also applies to Scotland s major city centre markets, with both Glasgow and Edinburgh possessing lease events equivalent to around 16% of current stock. The only real outlier is Aberdeen, which shows relatively modest potential demand, with lease events equating to less than 1% of current stock. THE RISE OF THE REFURB Investors will no doubt appreciate the case for further development, but without real confidence of strong rental growth to come, they remain understandably wary at the current time. However, the anticipated spike in lease events provides a strong case for repositioning of existing buildings through refurbishment as these could appeal to more cost conscious occupiers. As millennials come to dominate the workforce, occupiers are becoming ever more discerning in their requirements. Conventional one-size-fits-all grade A specification is arguably becoming less important. When considering refurbishments, landlords that can differentiate their offer to be more design-led and suited to increasingly flexible ways of working, stand to benefit most. Number of lease events in the five key markets Volume of lease events as share of stock (218 22, %) H , sq ft to 9,999 sq ft 1, sq ft to 19,999 sq ft 2,+ sq ft Aberdeen Edinburgh OOT Edinburgh CC Glasgow CC Glasgow OOT Source: LSH Research Scotland Office Market Report

14 THE GROWING NEED FOR LIFE SCIENCES BUSINESS SPACE IN SCOTLAND Whilst it is not considered to be on a par with San Francisco or Boston yet, over the last ten years Scotland has become one of the largest life sciences clusters in Europe with over 7 life sciences organisations employing more than 37, people. The rapid growth of the sector in Scotland over the last five years has been driven by an industry-led strategy. In 211 the Scottish life sciences strategy set out a bold vision, to expand the role of the industry as a dynamic contributor to the country s economic growth and social wellbeing. This was further galvanised with a specific aim to double the economic impact of the sector from 1.5bn to 3bn GVA by 22. Having now established itself as a leading global cluster, it is not a far-fetched ambition for Scotland to become the location of choice for life sciences. But to do this it must set itself apart and become the most effective place to develop innovations and commercial enterprise. It must develop an ecosystem where scientific endeavour leads to economic growth across the life sciences spectrum, producing more indigenous companies of scale with international growth potential and increasing manufacturing output of high-value products. The key components of the required ecosystem are a strong base of talented and inventive people, an array of impactful research supported by robust domestic and international partnerships, and high quality infrastructures underpinned by a skilled workforce with dynamic leadership to drive the sector forward. Although steady progress is being made, to be successful Scotland needs to build on its supportive investment community, with the National Health Service (NHS) acting as both a pivotal stimulator and adopter of innovative health products. Investment is bolstering the development of this ecosystem with a dedicated 47.5 million venture capital fund from Epidarex already secured. Numerous university spin-out businesses are attracting attention and investment from major pharmaceutical companies. Access to the country s single, unified healthcare provider (NHS Scotland) is also providing opportunities for utilising data that attracts academics and investors from around the world. However, all aspects of the Scottish life sciences ecosystem must be nurtured and strengthened, and the enthusiasm of all stakeholders harnessed to change today s vision into tomorrow s reality. Pivotal to growing the Scottish life sciences ecosystem is the expansion of available space within existing bioscience hubs, developing the supporting infrastructure, and the creation of new hubs. Huge excitement has surrounded the construction of the bioquarter in Edinburgh which began in 215 and, once fully developed, will offer up to 3.18m sq ft (295, sq m) of accommodation for academic, commercial and healthcare activity. Demand at the scheme is already far outstripping supply, and due to its early success it is expected to provide a blueprint for the development of life sciences hubs worldwide. Extending to more than 1 acres, bioquarter is a partnership between Scottish Enterprise, the University of Edinburgh, NHS Lothian and the City of Edinburgh Council. It has been developed with a view to creating an attractive environment for collaboration between industry, academic and clinical specialists, leading to the development of new pharmaceuticals, diagnostic tools and medical devices for the global healthcare market. In addition to larger facilities within the scheme it also contains a multi-occupancy facility with incubator space 14 Lambert Smith Hampton

15 Nine bioquarter Due to its obvious popularity and potential positive impact on the economy, Scottish Enterprise has recognised the need for further development not just of commercial laboratory and office space, but of hotel accommodation, multi-storey car parking facilities and a District Energy Network - and is backing the next phase of building at the site and looking into further opportunities. For more information, please contact: Calum McCrindle Project Manager, Scottish Enterprise +44 () calum.mccrindle@scotent.co.uk Between 215 and 216, Scotland saw a 16.7% increase in jobs in scientific research and development, and the signs are suggesting that this level of growth is set to continue. With investment, political backing and a clear market demand for life science office space in Scotland, the momentum looks set to build. With so many market conditions in its favour it is inevitable that inertia will bolster the Scottish ecosystem and create significant opportunities for those willing to get on board. More information on bioquarter is available on Growth in life sciences employment (212 to 217, %) All UK -1 Aberdeen South Lanarkshire Dundee Aberdeenshire Renfrewshire East Lothian Edinburgh West Lothian Scotland Office Market Report

16 TURNING UP THE HEAT ON YOUR ENERGY ACTION PLAN: meeting the new requirements The 1st of September 216 saw a new energy regulation in Scotland come into force, The Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 216 which derives from the Climate Change (Scotland) Act 29. This is not to be confused with the forthcoming changes due in England and Wales in March 218 which applies to the minimum energy efficiency standards. For more information, please contact: Kirsteen Lamont Surveyor +44 () klamont@lsh.co.uk The regulation sees the introduction of the now compulsory Section 63 Assessment and resultant Energy Action Plan. The document lists the necessary energy improvement actions required for an existing building to ensure that its energy efficiency is enhanced and CO 2 emissions reduced. The action plan is required in addition to a valid EPC, and must be obtained prior to marketing a property. 16 Lambert Smith Hampton

17 WHEN IS AN ACTION PLAN REQUIRED? If the property was brought to the market on or after 1st September 216 All newly marketed buildings/suites over 1, sq m (1, sq ft) If the property is eligible for an EPC If the building does not meet 22 building regulations standards or was not improved via a Green Deal THE PROCESS Where the regulation applies, the building is assessed against seven prescribed energy efficiency improvements. Building owners are required to produce an energy action plan which must be prepared in conjunction with an accredited Section 63 Advisor. Option 1 No prescriptive measures apply for improvement, and therefore there is no energy savings target. Action plan is lodged against the property and no further action is required. The property is deemed Section 63 Compliant. Option 2 Prescriptive measures apply and an energy savings target is defined. The Assessor will also provide an Alternative Measures Plan to provide a choice to the owner. WHAT NEXT? The owner decides which action plan to implement (prescribed or alternative) and it is then lodged against the building. The owner can choose to implement the improvements over the period of 3.5 years or can choose to defer the improvements by annual reporting of the actual measured energy use via a Display Energy Certificate. At present the deferral route can be taken indefinitely, however there is an annual assessor fee which in the long term is likely to be compared to the actual cost of the works. Landlords should be aware that whilst this route may look advantageous at present, the annual reporting postpones the work but does not remove the requirement to undertake improvement. Deferral will only delay works and may prove problematic in the future if the regulation is amended. As with the EPC, it is a requirement by law to provide any perspective buyer or tenant with the action plan upon request. Some professionals have suggested that there should be greater transparency at this stage, especially for perspective buyers who will potentially inherit a statutorilyimposed burden contained in the already-lodged energy action plan. CAUTION TO OWNERS EFFECT IS YET TO BE SEEN We have yet to see the full impact of the new regulation and, unlike the MEES, there has been a lack of publication on matters, which has left many feeling a little in the dark. We expect that more and more transactions will begin to see the effect of the action plan and, whilst owners will take the initial hit, we may begin to see some shifting of responsibility onto the tenant as part of the negotiation. There is likely to be an effect on property values in the short and long term. For example, some vendors will have already been subject to price chipping which will ultimately drive the capital rate per sq ft down. In the short term we may see a decrease in values, however the proposed works will inevitably improve the property and it could be argued that we will eventually see these values rise again once works have been implemented. Furthermore, some landlords may choose to carry out prescribed measures as part of a transaction which could allow them to demand a higher rent from ingoing occupiers. If the emphasis is continued to be placed on the owners then we could begin to see an increase in capital costs which we can only expect to lead to increased values in the long term. WHAT ACTION CAN OWNERS TAKE? At present the fine for non-compliance is only 1, which may be significantly less than the cost of implementing a plan, however this may change once the regulation is reviewed. The fine does not remove the regulatory obligation and the owner will still be required to adhere to the regulation. Therefore owners should be actively thinking in advance if they have a property which falls under the criteria with any lease events looming even in the next couple of years. Landlords with upcoming lease expiries within their buildings should be approaching their tenants now to discuss the possibility of lease extension. Others should be assessing timescales of lease expiries and breaks as well as any planned common parts works, as an Alternative Measure Plan can take these into account. Unlike the position in England and Wales, decisions can still be made in Scotland regardless of the rating, which should be encouraging for investors. Owners should remain cautious however they should also embrace the change and the flexibility that the regulation has in terms of improvements. We would recommend all concerned clients to seek advice from an accredited Section 63 Assessor as soon as possible upon the marketing stage. Scotland Office Market Report

18 REGIONAL OVERVIEW 18 Lambert Smith Hampton

19 Scotland Office Market Report

20 ABERDEEN Highlights Aberdeen witnessed strong take-up in H1 217, albeit this was skewed by Total s relocation to a 13, sq ft facility in Westhill. Total availability in Aberdeen has fallen since 216, but remains substantial at circa 2.5m sq ft. Speculative development at Marschial Square and The Silver Fin will complete in H2 217 delivering over 3, sq ft of new office space. Prime headline rents are forecast to remain stable at 32. per sq ft into 218. Demand Aberdeen take-up ( sq ft) Take-up in the first six months of 217 was 289, sq ft, 4% above the total for the whole of 216. This was, however, inflated by Total s 13, sq ft relocation from Aberdeen city centre to a facility in Westhill previously occupied by Subsea 7. As the European capital of the oil and gas industry, energy and utilities occupiers understandably drove demand, accounting for 59% of total take-up over the past 12 months. The strength of demand in Aberdeen from this sector has fallen significantly following the collapse of oil prices in 214, but the office market is showing signs of improvement on the back of more recent rises since 216 and the impact of the weak sterling rate. It should, however, be noted that the oil price recovery is building from a very low base. Other prominent transactions during the past 12 months in Aberdeen city include Chrysaor Holding s lease of 44,951 sq ft at The Capitol on Union Street, Somebody Cares lease of 35,158 sq ft at Trafalgar House on Hareness Road and Marathon Oil s lease of 29,21 sq ft at Anderson Drive year average H Grade A Grade B/C H2 forecast Aberdeen take-up by sector (past 12 months) For more information, please contact: Ian Davidson Director, Business Space +44 () idavidson@lsh.co.uk Current supply Total availability in the Aberdeen market has fallen by 5% since the end of 216, but remains substantial at circa 2.5m sq ft. Based on average annual take-up, this translates into 4.5 years of supply. Aberdeen is second only to the out-of-town Glasgow market in terms of supply in key Scottish markets. Grade A space accounts for one third of total availability reflecting the high level of development over the past few years. This includes significant space in the new Marischal Square (173,5 sq ft) and Silver Fin (132, sq ft) schemes which are due for completion this year. Smaller grade A properties of circa 2, sq ft are available for immediate occupation at 49 York Street, Gateway Drive and the IQ Building, Justice Mill Lane. The remainder of available stock comprises second-hand grade B and C properties, a significant proportion of which are located in secondary city centre locations and out-of-town business parks. The largest examples of this secondary stock comprise grade B buildings at Trafalgar House (59,723 sq ft) and Riverside House (54,66 sq ft). Aberdeen availability ( sq ft) Energy and utilities Public sector, not-for-profit, charities Professional services Serviced offices Construction and engineering Other 5 Andrew Shiells Director, Capital Markets +44 () ashiells@lsh.co.uk Q2 217 Grade A Grade B/C 2 Lambert Smith Hampton

21 12 month take-up vs 1-year average Years of supply Grade A share of supply Q2 217 headline rent (per sq ft) Prime yield -22% % % ABERDEEN Development prospects Aberdeen Journals are under offer on approximately 2, sq ft at Marischal Square, part of a 173, sq ft development funded by Aviva Investors, whilst serviced office specialists Orega recently agreed to take 26, sq ft at Silver Fin, Union Street, a 132, sq ft development by Titan Investors. The Aberdeen Gateway is a prime commercial business park with 45 acres of land to be developed by JW Muir Group. The development masterplan includes an office park with an adjacent industrial scheme. Consented sites are available for design-and-build office development from 2, sq ft. Existing occupiers at Aberdeen Gateway are primarily associated with the petroleum industry, such as Ensco and Cameron. Market rental values and yields Since 214, prime rental levels in Aberdeen have remained stable at 32. per sq ft, however, rent free periods, for the best space, have increased significantly. Of late, however, incentive packages have shown some signs of stabilising. Prime office yields stand at circa 6.5% in the Aberdeen market, although there has been a low level of transactional activity in the past 12 months to confirm this level. Reflecting the weakening conditions in the market, prime yields have softened since 215 when they were as low as 5.75%. The most notable transaction in the past year took place in February 217 when LCN Capital Partners purchased Prime Four Business Park for 41.28m, reflecting a net initial yield of 6.64%. Outlook The strong supply of grade A properties set against a diminished level of demand in Aberdeen suggests that market conditions will remain challenging in the short to medium term. Whilst a further 15, sq ft of take-up is anticipated prior to year-end, the 217 performance will remain below the 1-year average. Prime headline rents are forecast to remain at their current level for the remainder of 217 and into per sq ft Aberdeen prime rental values forecast ( sq ft) Aberdeen under construction ( sq ft) Pre-let Speculative Q (f) 218 (f) 216 Q2 217 EDINBURGH CITY CENTRE EDINBURGH OUT-OF-TOWN GLASGOW CITY CENTRE GLASGOW OUT-OF-TOWN Source: LSH Research Thames Scotland Valley Office Office Market Market Report Report

22 EDINBURGH CITY CENTRE Highlights Strong take-up in H1 217 was underpinned by the GPU s 181,37 sq ft pre-let at New Waverley. Supply has declined steadily and now stands at its lowest level since 21. New schemes commencing are at least 24 months from completion and the majority of the space currently under construction is already committed. The city s prime headline rent is forecast to increase to 34.5 per sq ft by the end of 218. Demand Following a steady year in 216, take-up in Edinburgh city centre rose significantly in the first half of 217 and was more akin to the record level seen in 215. The market is buoyant and, with strong appetite for good quality space, there is a significant level of unsatisfied demand due to the time lag on development completions. H1 217 take-up of 631, sq ft was 83% above the level of H2 216 and was boosted by a number of notable deals, the largest being the Government Property Unit s (GPU) 181,37 sq ft pre-let at New Waverley. Other key deals included State Street Bank & Trust s lease of 65,628 sq ft at Lauriston Place and Computershare s lease of 41,395 sq ft at North St Andrew Street. While the GPU deal underpinned strong take-up for the public sector, professional services has been the most active, responsible for over one third of all deals over the past 12 months. Notable examples included EY at Morrison Street (32,5 sq ft), Burness Paull at Lothian Road (26,83 sq ft) and Baillie Gifford, Leith Street (12,74 sq ft). Edinburgh CC take-up ( sq ft) Grade A 1-year average Grade B/C H2 forecast Edinburgh CC take-up by sector (past 12 mths) H1 217 For more information, please contact: Ian Davidson Director, Business Space +44 () idavidson@lsh.co.uk Current supply On the back of recent activity, total availability decreased by 21% in H1 alone to stand at circa 1m sq ft, its lowest level since 21. Against average take-up, current availability is equivalent to 1.6 years of supply, the lowest of any of the key Scottish markets. Grade A space currently accounts for 41% of availability spread across 17 buildings. Sizeable options include 62,416 sq ft at 1 Lochrin Square and 29,81 sq ft at Saltire Court. Smaller floorplates of sub 1, sq ft are available at Edinburgh Quay and Quartermile. Edinburgh CC availability ( sq ft) Public sector, not-for-profit, charities Professional services Technology, media and telecomms Finance, banking, insurance Energy and utilities Other Andrew Shiells Director, Capital Markets +44 () ashiells@lsh.co.uk Q2 217 Grade A Grade B/C 22 Lambert Smith Hampton

23 12 month take-up vs 1-year average Years of supply Grade A share of supply Q2 217 headline rent (per sq ft) +52% % % Development prospects There are several speculative schemes currently under construction totalling 417, sq ft, all of which are due for delivery in the next 24 months, however, almost half of this space is pre-let. The St. Andrew s Square development (11, sq ft) is due for completion in Q3 217 and is fully let to Standard Life Investments. Also due for completion in late 217 is Quartermile 3 (72,991 sq ft) which has only 7, sq ft available after securing a large pre-let to State Street Bank & Trust Company and Greenside (42,872 sq ft) which is partially let to Nucleus Financial with circa 25, sq ft remaining available. Three Semple Street (35,9 sq ft) is currently on site and available for pre-let while Hermes Investment Management s 152,623 sq ft Capital Square development at Morrison Street is due to commence in Q Elsewhere, 61, sq ft of office space is scheduled to complete at The Registers development in Q Market rental values and yields At 33.5 per sq ft, Edinburgh city centre s prime headline rent has increased steadily since 213 when it stood at 31.5 per sq ft. The market has, however, strengthened to a greater extent than this growth suggests as incentive packages have tightened considerably over the period. The office investment market has demonstrated a healthy level of activity. Prevailing sentiment indicates prime office yields stand at 5.25% and are likely to harden further. Recent deals include TRIUVA s purchase of 2-4 Waterloo Place for 63m (NIY 5.69%) and two transactions at Exchange Place, with No. 1 achieving 47m (NIY 5.57%) to GLL Real Estate Partners and Nos. 2 & 3 completing at 36m (NIY 5.86%). Outlook Despite a strong performance to the half year point, take-up in H2 is expected to reduce by comparison due to the lack of any transactions of similar scale to the New Waverley deal. That said, activity for 217 as a whole will surpass the 1-year average and is expected to total in excess of 93, sq ft. Given the number of unsatisfied large-scale requirements in the market and the 24 month time lag before new developments become available, it is anticipated that rents could reach upwards of 34.5 per sq ft by end of 218 with incentive packages reducing further during this period per sq ft Prime yield Edinburgh CC prime rental values forecast ( sq ft) Edinburgh CC under construction ( sq ft) Pre-let Speculative Q (f) 218 (f) 216 Q2 217 ABERDEEN EDINBURGH CITY CENTRE EDINBURGH OUT-OF-TOWN GLASGOW CITY CENTRE GLASGOW OUT-OF-TOWN Source: LSH Research Thames Scotland Valley Office Office Market Market Report Report

24 EDINBURGH OUT-OF-TOWN Highlights Take-up in H1 217 was a record for a half-year period, boosted by Scottish Prison Service s 51,9 sq ft lease at Redheughs Rigg. There is an acute shortage of grade A accommodation in the out-of-town market with the only available opportunities located at Lochside View and Ocean Point. Speculative development has been limited resulting in a lack of quality standing stock. The lack of high quality opportunities is driving prime headline rents and a tightening of incentive packages. Demand Robust take-up of 285,5 sq ft occurred during H1 217, only 13% below the entire total for 216 which itself was a strong year of activity. H1 was boosted by a flurry of sizeable deals, namely the Scottish Prison Service s 51,9 sq ft lease at Redheughs Rigg and Standard Life Investment s 31,355 sq ft lease at South Gyle Broadway. Out-of-town supply is dominated by second-hand stock and this is reflected in the pattern of take-up. During the past 12 months only two grade A transactions have taken place; Mastercard at Ocean Drive (7,866 sq ft) and Akamai Technologies Ltd at Lochside View (4,457 sq ft). While out-of-town demand was driven by a broad range of occupiers, public, not-for-profit and charity organisations were responsible for the highest number of deals and the greatest share of take-up. In addition to the Scottish Prison Service, other notable transactions included Royal Blind s 21,969 sq ft lease of 2a Roberston Avenue and the International Grace Ministries 16,384 sq ft lease at Grayfield House. Edinburgh OOT take-up ( sq ft) Grade A 1-year average Grade B/C H2 forecast H1 217 Edinburgh OOT take-up by sector (past 12 months) For more information, please contact: Ian Davidson Director, Business Space +44 () idavidson@lsh.co.uk Current supply Out-of-town availability has gradually decreased since 215, currently standing at circa 749, sq ft, 4% down from the end of 216. Based on average take-up, this translates to 3.1 years of supply. While overall supply remains robust, there is an acute shortage of grade A opportunities. Grade A space accounts for only 3% of total availability and comprises only two options, the largest of which is 7 Lochside View, Edinburgh Park (14,337 sq ft). By contrast, good grade B options are plentiful, the majority of which are located at Edinburgh Park and South Gyle. The largest opportunity of 11, sq ft lies to the north of the city at 525 Ferry Road and comprises a stand-alone facility currently occupied by State Street Bank that will fall vacant shortly when their relocation to Quartermile completes. Edinburgh OOT availability ( sq ft) Public sector, not-for-profit, charities Professional services Retail, distribution and transport Construction and engineering Technology, media and telecomms Other 4 2 Andrew Shiells Director, Capital Markets +44 () ashiells@lsh.co.uk Q2 217 Grade A Grade B/C 24 Lambert Smith Hampton

25 12 month take-up vs 1-year average +7% 3.1 3% % Development prospects Outlook Years of supply per sq ft Grade A share of supply Despite healthy unsatisfied demand and a lack of available grade A opportunities, speculative development has been extremely limited in recent years. The only recent scheme was completed by Herriot-Watt University who developed an 84, sq ft building at their University Research Park campus to the west of the city in Q This does not represent conventional office stock, however, as prospective occupiers are required to be affiliated with the University or perform a research and development function. Office supply has also been subject to a moderate level of erosion by redevelopment projects, the most notable of which was the recent purchase of Chesser House (1, sq ft) for conversion to residential use. This sustained lack of new development and shortage of grade A space has repercussions for growth and attracting inward investment to the out-of-town areas. Significant planning consents exist in the key locations, but with the exception of Parabola's forecast development 85, sq ft at Edinburgh Park, prime rents are yet to recover to the point where developers have the confidence to progress speculative development. Market rental values and yields With demand outstripping quality supply, rental values for the best second-hand stock have risen steadily and consistently since 212. In the current market, prime headline rents stand at 2. per sq ft, an increase of 5% from the end of 216. With regard to investment, there is little office stock or transactional evidence to confirm the current position for prime yields. Based on sentiment however, it is considered that prime out-of-town office yields stand at circa 6.25% and no change is anticipated in the immediate future. With half year take-up almost equal to for the whole of 216 and already exceeding the 1-year annual average, the forecast for the remainder of 217 is positive with a further 1, sq ft of space expected to transact. While the acute lack of grade A space is likely to constrain activity moving forward, the absence of new-build completions is expected to maintain upward pressure on headline rental levels and promote a tightening of incentives. By the close of 217 headline rents are forecast to reach 21. per sq ft with 22. per sq ft considered likely by the end of Q2 217 headline rent (per sq ft) Edinburgh OOT prime rental values forecast ( sq ft) Prime yield Edinburgh OOT under construction ( sq ft) Pre-let Speculative 214 Q (f) 218 (f) 216 Q2 217 ABERDEEN EDINBURGH CITY CENTRE EDINBURGH OUT-OF-TOWN GLASGOW CITY CENTRE GLASGOW OUT-OF-TOWN Source: LSH Research Thames Scotland Valley Office Office Market Market Report Report

26 GLASGOW CITY CENTRE For more information, please contact: Highlights Take-up has been steady in H1 217, with significant lettings to the Student Loans Company and Mott McDonald. Grade A space is scarce, with only two buildings of this quality currently available. Reported pre-lets to government occupiers will significantly boost take-up in the second half of 217, including the Government Property Unit s 18, sq ft pre-let at Atlantic Square. Without speculative development prime headline rents will remain steady, although rental growth in quality refurbishments has taken place. Demand After a very strong 216, take-up in Glasgow city centre during H1 217 was healthy, if unspectacular, at 235, sq ft. Secondhand space has dominated, with grade A space accounting for only 22% of the take-up. H1 s largest transactions were the Student Loans Company s lease of 4,853 sq ft at the Europa Building and Mott McDonald s lease of 34,515 sq ft across two floors at St Vincent Plaza. The professional services sector has been particularly active, accounting for 4% of deals over the past 12 months. However, this was dominated by smaller transactions, the largest being Search Consultancy s lease of 9,116 sq ft of grade B space at Atrium Court. Three quarters of the deals over the past 12 months were below 5, sq ft, with the focus of this activity within the traditional office core at West George Street and St Vincent Street. While the area is desirable, new development here is restricted by its conservation area status and existing road layout. Consequently, in search of modern space, larger occupiers are opting to locate outside of the traditional core in areas such as the Waterfront and the east and west sides of the city centre. Here, larger modern floorplates are available and new office business district clusters are becoming established. Active demand from occupiers remains high in Glasgow city centre. It has recently been reported that the Government Property Unit has agreed to pre-let 18, sq ft at Atlantic Square as its first phase of establishing a regional hub. Further the Department for Work and Pensions and the Scottish Courts have agreed lettings at No. 1 and No. 3 Atlantic Quay respectively. Glasgow CC take-up ( sq ft) Grade A 1-year average Grade B/C H2 forecast 215 Other 216 Glasgow CC take-up by sector (past 12 months) H1 217 Professional services Construction and engineering Retail, distribution and transport Energy and utilities Public sector, not-for-profit, charities Aasia Mohammad Director, Business Space +44 () amohammad@lsh.co.uk Current supply Availability stands at a relatively elevated 1.9m sq ft, equivalent to 3.2 years supply based on average take-up. However, grade A options are scarce, with availability amounting to only 61,26 sq ft within just two buildings, namely St Vincent Plaza (26,91 sq ft) and 1 West Regent Street (34,116 sq ft). Glasgow CC availability ( sq ft) Ewen White Director, Capital Markets +44 () ewhite@lsh.co.uk In contrast, grade B supply is relatively abundant in terms of both size options and location. Atlantic Quay, located along Glasgow s waterfront and in the heart of the International Financial Services District, currently has a range of buildings available capable of satisfying larger requirements, ranging from 57, sq ft to 84, sq ft. The scarcity of grade A space has boosted the opportunity to reposition existing buildings via high quality refurbishment. Currently, 91, sq ft at 191 West George Street is undergoing refurbishment by NFU Mutual with completion expected in December Grade A Grade B/C Q Lambert Smith Hampton

27 12 month take-up vs 1-year average -2% 3.2 3% % Development prospects Morgan Stanley s 15, sq ft pre-let at Bothwell Exchange is the sole new development currently under construction and is due to complete in Q While there are no speculative developments underway, consents are in place at several prominent sites. Examples include the former Corunna House (275, sq ft), 177 Bothwell Street (225, sq ft) and Broadway Central (18, sq ft). Given the lack of supply there are increasing suggestions that developers will proceed, although it is likely that pre-lets are required before construction can commence. Market rental values and yields Prime headline rents edged up to 3. per sq ft in 216 due to increased demand, having previously been stable at 29.5 per sq ft for several years. Moving forward incentive packages will tighten in response to the lack of grade A availability. With new-build options in such short supply, quoting rents for quality refurbishments are now similar to prime levels, a significant increase for these types of buildings. 191 West George Street is quoting in the range of 28. to 3. per sq ft. The office investment market in Glasgow city centre has been relatively active over the past 12 months. Notable investment transactions include Credit Suisse s 28m purchase of 48 Argyle Street (NIY 6.8%) and George Capital LLP s 17.5m purchase of 131 West Nile Street (NIY 7.%). Prime office yields currently stand at 5.75% and sentiment suggests that this is likely to improve in the short-term. Prime yields decreased 25 bps from 6.% after the general election and have remained stable since. Outlook Despite a modest first half to 217, take-up for the year as whole is expected to comfortably exceed the 1-year average 217 thanks in no small part to the GPU s 18, sq ft commitment. While prime rents are likely to remain stable, incentive packages on larger floorplates will tighten due to pent up demand. Speculative development is necessary if prime rents are to move forward in 218, but without commitment from potential clients development is unlikely to be initiated. With the demand for good quality refurbished properties, we expect that more investment in refurbishment of second hand stock will occur although the floorplates may be restrictive for larger occupiers. Looking further ahead, there are a number of major lease events set to occur in 22 and there is real concern that these occupiers may not be accommodated in Glasgow city centre without new build stock. 218 Years of supply 3. per sq ft Grade A share of supply Q2 217 headline rent (per sq ft) Glasgow CC prime rental values forecast ( sq ft) Prime yield Glasgow CC under construction ( sq ft) Pre-let Speculative 214 Q (f) 218 (f) 216 Q2 217 ABERDEEN EDINBURGH CITY CENTRE EDINBURGH OUT-OF-TOWN GLASGOW CITY CENTRE GLASGOW OUT-OF-TOWN Source: LSH Research Thames Scotland Valley Office Office Market Market Report Report

28 GLASGOW OUT-OF-TOWN For more information, please contact: Highlights Take-up in H1 was strong although activity in 217 as a whole is expected to be in line with the annual average. Supply currently stands at an ample 4.7 years, but is predominantly made up of grade B/C properties with the only grade A offering at Maxim Office Park. Speculative development has been scarce, although previously developed buildings at Maxim Office Park are showing increasing demand. Prime headline rents are forecast to remain at their current position throughout 218. Demand Glasgow s out-of-town market is enjoying a strong run of activity. At 22,777 sq ft, take-up in the first half of 217 alone is approaching its annual average. 216 was also an exceptional year, boosted by the University of the West of Scotland s (UWS) major 225, sq ft relocation in Q4 to their new site at the Eco Campus, Hamilton International Park. UWS took occupation of three existing new office buildings that fitted out to shell and core only. Other prominent deals over the past 12 months include Balfour Beatty s lease of 43,568 sq ft at Maxim Eurocentral and Police Scotland s lease of 27,768 sq ft at Osprey House, Paisley. Grade A space has accounted for 45% of take-up in the past 12 months, albeit this is heavily skewed by the UWS transaction. The technology, media and telecoms (TMT) sector has been a key driver of demand, responsible for approximately one third of all deals over the past 12 months. Notable transactions include NXP at Pegasus House, East Kilbride (2,943 sq ft), Airwaves Solutions Ltd at Skypark 5 (9,461 sq ft) and Axis Productions Ltd at Skypark 1, Glasgow (8,489 sq ft). While occupier demand is robust, the majority of active demand exists within the sub 5, sq ft bracket. However, a number of larger sized requirements, ranging up to the plus 5, sq ft category, are also active. Glasgow OOT take-up ( sq ft) Grade A year average 212 Grade B/C H2 forecast Glasgow OOT take-up by sector (past 12 months) H1 217 Public sector, not-for-profit, charities Construction and engineering Technology, media and telecomms Pharmaceutical, medical, healthcare Current supply Professional services Other Aasia Mohammad Director, Business Space +44 () amohammad@lsh.co.uk Ewen White Director, Capital Markets +44 () ewhite@lsh.co.uk There is ample choice in the market, with total availability standing at 1.5m sq ft. Based on average take-up, this equates to 4.7 years supply, the highest of any of the key markets in the region. Grade A space makes up a significant 36% of current availability, albeit this is found entirely at Maxim Office Park, located east of Glasgow by the newly upgraded M8 motorway interchange. A number of options are available here across nine buildings ranging from 9,633 sq ft at Maxim 3 to 187,26 at Maxim 5. While Maxim Office Park has endured persistent high vacancy, demand is beginning to increase in this location. Elsewhere, a range of good quality grade B options are available. Larger examples include Strathclyde Business Park (178,247 sq ft across eight properties) and Hamilton International Park (118,451 sq ft across three properties). Glasgow OOT availability ( sq ft) Q2 217 Grade A Grade B/C 28 Lambert Smith Hampton

29 12 month take-up vs 1-year average +81% % % Development prospects There are at present two developments under construction. Tollcross Housing Association is currently constructing a 12,1 sq ft office at Durina Street for its own occupation, while Clyde Gateway is spec building another small unit Red Tree Business Suite site at Shawfield. Despite the lack of grade A stock outside of Maxim Office Park, there is no further speculative development taking place across Glasgow s out-of-town market. Planning permission is in place for additional development in a number of the established business parks. This includes circa 2, sq ft mixed-use scheme at Central Quay and a 15, sq ft development known as the Azure Building in the Skypark. While relevant permissions are in place it is unlikely that any new build will come forward on these sites in the near future due to lack of demand in the area for large floorplates. Clyde Gateway, situated in an edge-of-town location to the east of the city centre, has recently been regenerated and was home to the Commonwealth Games in 214. With public agency support and financial incentives, the area offers excellent development potential. Specifically, Magenta at Clyde Gateway is the largest approved office development in Scotland, with planning for circa 1.2m sq ft of office space. The public agencies involved in the Clyde Gateway are seeking private sector developers and pre-let commitments from potential occupiers. Market rental values and yields Since 214, prime rents in the Glasgow out-of-town market have remained stable at 14.5 per sq ft. This level was recently confirmed by the aforementioned lettings to Balfour Beattie and UWS. With regard to investment, there is little transactional evidence to confirm the current position for prime yields. Based on sentiment however, prime office yields in out-of-town Glasgow stand at circa 7.%, with no change anticipated in the short-term. Outlook Activity is expected to remain steady in the second half of 217, with a further 8, sq ft of take-up expected which will bring total take-up into line with the 1-year average. Prime headline rents are forecast to remain at their current position throughout 217, with no change expected in 218 without new space delivered to the market. While development sites are available, it is highly unlikely that development will commence without prior commitment from potential tenants to initiate development. 218 Years of supply per 14.5 sq ft Grade A share of supply Q2 217 headline rent (per sq ft) Glasgow OOT prime rental values forecast ( sq ft) Glasgow OOT under construction ( sq ft) Pre-let Speculative Prime yield Q (f) 218 (f) 216 Q2 217 ABERDEEN EDINBURGH CITY CENTRE EDINBURGH OUT-OF-TOWN GLASGOW CITY CENTRE GLASGOW OUT-OF-TOWN Source: LSH Research Thames Scotland Valley Office Office Market Market Report Report

30 TOCS 217 Total office cost survey Easily view and compare location costs Check office costs are in line with market rates Benchmark against other UK locations The definitive guide to UK office costs Visit lsh.co.uk/tocs to find out more 3 Lambert Smith Hampton

31

32