At the start of 2023, I wrote an article that identified key factors likely to affect the Aberdeen property market in the year ahead. Activity and investment in the energy sector, buyer confidence in the residential market and progress towards energy transition were all expected to impact the local market.
Nationally, the energy sector has been a political football over the last 12 months, but global economic and political forces have a greater influence on the oil price, which remained resilient in 2023 and is key for driving activity in the UKCS and the north-east economy.
Activity in the oil and gas industry, investment in offshore renewables, energy transition, carbon capture and storage, and the arrival of cruise ships fuelled cautious optimism in the local market and that positivity was felt in all sectors of the commercial property market. However, it was not enough to insulate the local housing market from the headwinds facing the UK residential market.
How did the property market fare in 2023?
Office: After a sluggish start to the year, the office market in Aberdeen enjoyed a strong finish to 2023. Vacant stock is at its lowest level since 2015, with the vacancy rate for Grade A space falling to 2% as the flight to quality continued. With limited capacity at The Capitol, Silver Fin and Marischal Square and a shortage of new stock in the pipeline, occupancy rates for refurbished west-end offices increased. Out-of-town, Prime Four Business Park at Kingswells also benefited, with occupiers looking beyond the City limits for quality, with a significant letting to Odfell Technology and multiple sub-lettings being reported.
Industrial: The market for good quality industrial units above 10,000 sqft increased, continuing the trend over recent years, helped by demand from the energy sector, and with activity being spread across all industrial bases. Reports of rising rents in the sector point to good demand for the right property.
Residential: The ASPC report for 2023 showed no house price growth. This compares against an annual increase of 3.2% for City prices in 2022. As expected, the story of the residential market last year was one of construction costs, inflation and interest rates, with a number of national housebuilders starting 2023 by announcing a cautious approach to activity. Throw into the mix a cost-of-living crisis, short-term letting licences, rent controls and increased Additional Dwelling Supplement, and there is a case to be made that a flat market was a reasonable result.
So, what to watch for the year ahead?
The UK general election will undoubtedly see political change which will affect the energy sector at a national level. Uncertainty is a repellent to investment and a clear national energy strategy is overdue. While they cannot change the oil price, elected governments can control the fiscal and regulatory environment to attract investment. However, current predictions are for strong global demand for oil in 2024, which will continue to drive activity in the commercial property sector in the north-east.
With inflation easing, we may see a couple of base rate cuts before the end of 2024. Some lenders are already offering better mortgage deals, which will improve buyer confidence in the residential market. Some of the 2023 challenges which dogged the residential market will continue and the surprise increase to income tax in Scotland will not help, but with construction costs levelling out, and inflation and interest rates set to fall, there may be moderate growth towards the end of 2024.
Governments may rise and fall, but in 2024 the oil price will remain key for the north-east economy.