A Year in Review: Scottish Commercial Property

As the year draws to a close, the Scottish commercial property market demonstrates a mix of resilience and cautious optimism, shaped by a variety of economic, legislative, and sectoral factors. Despite challenges, there are clear opportunities for investors and occupiers alike.

The Scottish commercial property market is poised for a period of adjustment and stabilisation, influenced mainly by interest rates, but also the 2024 Autumn Budget, rent control policies and the influence of a changing political landscape. Key 2024 observations include:

Industrial Sector Resilience: The industrial and logistics sector continues to be a strong performer within the current market, driven by the continued expansion of e-commerce. Investor demand for warehouses and distribution hubs continues, meaning this sector is performing well, particularly in the Central Belt.

Office Market Evolution: The demand for flexible, high-quality office spaces continues as businesses seek to adapt to hybrid working patterns. However, older, less efficient office stock faces dwindling interest, creating a disparity within the sector. Companies are looking to utilise the space they already have by adapting layouts and reconfiguring spaces to suit different team sizes, work styles and dynamic uses of space. The focus is on areas carved out for collaborative and focused, individual work. In 2025, the role and design of office spaces will likely continue to evolve to suit the changing needs of businesses and employees.

Retail Recovery Uneven: The retail sector continues to be one of the most susceptible to consumer trends and behaviour. There is evident volatility within the market with retailers either being able to keep pace with their consumer demands, resulting in expansion and excelling, or struggling to remain viable. While retail parks and prime shopping centres are seeing renewed interest, demand for high-street retail remains subdued due to changing consumer habits and economic pressures.

Investor Sentiment: The Scottish commercial property market is susceptible to wider global trends however in the UK, specifically, investment volumes are expected to increase following two years of decline. It is expected and readily anticipated that falling base rates will likely instigate opportunistic buying with investors aiming to capitalise on the down market. Currently, the market has seen a cautious resurgence in investor interest, with opportunistic investments in well-located assets and sectors showing long-term growth potential.

A range of factors are influencing the Scottish commercial property market:

Economic Uncertainty: The broader UK economic environment, characterised by rising interest rates and inflation, continues to impact investor confidence. Higher borrowing costs are slowing down some transactions. That said, interest rates are set to stabilise towards the end of 2024, continuing throughout 2025. It’s predicted that this will be one of the key factors in boosting business confidence and increasing commercial real estate activity. Lowered interest rates will mean a reduction in the cost of financing, directly impacting how much investors can borrow and at reduced costs, compared to the current climate. This is expected to result in an increase in purchasing power for investors allowing them to transact for higher-value properties extending and diversifying their portfolios.

Legislative Developments: The Scottish Government's recent initiatives, including proposals for housing reforms, are creating uncertainty for developers and landlords. Additionally, the rent control freeze on the Build to Rent sector has had a significant influence. The rationale of rent control policies ordinarily aims to provide a means of affordable housing and to protect tenants from displacement. The reality for the commercial property market more broadly, is that such policies typically discourage investment and curtail development in the Build to Rent market, particularly. These measures could influence the appetite for new developments, with the biggest impact on mixed-use schemes.

Sustainability Requirements: Environmental, Social, and Governance (ESG) considerations increasingly shape investment decisions. Properties with strong sustainability credentials are attracting higher levels of interest and commanding premiums. Properties designed with sustainability at the forefront will become a continued and increasing priority. Eco-friendly materials, energy-efficient systems and designs that reduce environmental footprint will continue to gain traction with occupiers.

Sectoral Adjustments: The industrial sector is benefitting from long-term structural shifts, while the office market must adapt to hybrid working trends. Retail property continues to evolve, with investors focusing on assets aligned with changing consumer behaviours.

Despite current challenges, the Scottish commercial property market offers opportunities for growth and investment, particularly in sectors such as industrial and high-quality office spaces. Investors, developers, and occupiers will need to remain agile, closely monitoring market dynamics and emerging trends to stay ahead.