Report from insurance group RSA suggests no growth in the sector until 2014
The rate of commercial real estate construction in Scotland has fallen further than the UK average since 2007 with output values having fallen by 40 per cent a new report suggests.
Commercial insurance group RSA's Castles in the Air report found overall output values across the UK dropped by 32 per cent between 2007 and 2011 to £28 billion – the lowest level in 10 years – which RSA suggests represents a loss of around £13 billion to UK Plc.
In Scotland, output values dropped 40 per cent in the same period, which represents a drop of £1.4 billion in commercial real estate construction activity, RSA suggests.
RSA estimates the UK commercial real estate (CRE) sector faces “a long, slow recovery” with positive growth not expected until 2014 - and then only by 0.3 per cent – and a return to pre-crisis highs is not expected until 2023.
Demand for new developments is also stalling, RSA suggests, citing retail and office rents in Glasgow – the only Scottish city in its survey - to have fallen by six and 12 per cent respectively since 2007.
However, Glasgow was the best performing city outside of central London, according to the report.
Liverpool and Manchester were the two worst performing cities in its UK survey, where retail rates fell 17 per cent and office rents by 20 per cent respectively.
The other UK cities included in the report were Birmingham, Bristol, Cardiff and Leeds, all of which show double digit rent falls in both retail and office space since 2007.
Central London was the only UK city of the eight surveyed to show growth in retail rents - up seven per cent – though office rents since 2007 have fallen by six per cent.
Edinburgh and Aberdeen, two of Scotland's most vibrant cities in terms of commercial real estate development, are not featured in the report.
RSA said: “With UK vacancy rates in the first quarter of 2012 standing at 12.6 per cent and employment in financial and business services predicted to fall, demand for new prime office real estate – both locally and nationally – is likely to remain weak for some time.”
The Castles in the Air report, compiled by RSA and the Centre for Economic and Business Research (CEBR) found that, on a national level, and despite the positive GDP figures released last week, the recession has led to a peak-to-trough decline of 42 per cent in construction output, which it said closely follows GDP.
Its report adds: “In fact, between 2007 and 2011 the value of Britain’s commercial property portfolio fell from £41 billion to £28 billion.
“Looking forward, this figure is predicted to drop again in 2012 to £27 billion and is not expected to return to positive growth until 2014 when only a modest 0.3 per cent rise is anticipated – far below the rate of growth currently reported at a national level.”
Paul Greensmith, RSA’s director of risk managed business, said: “The UK’s commercial real estate sector has been hit hard by the recession, and with CRE growth so closely tied to GDP, it’s not surprising that we’ve seen such a sharp decline in output values since 2007.
“Glasgow has seen significant real estate investment in recent times, with projects such as Glasgow Harbour creating distinct peaks in CRE construction activity.
“The region has been considerably impacted by the recession, so we are unlikely to see a return to such flagship projects anytime soon.
“While a return to the pre-recession highs of 2007 may not be wholly realistic, what’s important now is that local developers approach new investment opportunities sensibly and with sustainable growth in mind.”
Greensmith added: “High vacancy rates are set to become a huge issue for the commercial real estate and construction industries as recovery remains elusive, threatening profits and presenting new risks associated with empty sites and buildings.
“Adequate security and regular checks are recommended for property owners in this situation to mitigate the increased risks of burglary, arson and water damage.
“However, despite vacancy issues and the growing trend of ‘mothballing’ developments to save ongoing costs, there is still an appetite for the right kind of projects – with mixed use developments in particular still going ahead.”
Castles in the Air findings are based on economic modelling of Office for National Statistics, Estates Gazette and Colliers data, as well as analysis and insight by RSA’s commercial real estate and construction experts.