This time last year, I predicted how the Aberdeen property market may fare in 2024 and the factors that might influence it. So, how did I do?
In fairness, except for anyone betting on a July general election, the events of 2024 surprised many, but not all surprises are pleasant.
Stating the obvious, I predicted that the fortunes of the local economy would track the performance of the oil industry and speculated whether a change in government, following the UK general election, would improve the fiscal and regulatory environment for investors in the industry. The newly elected Labour government’s decision to increase and extend the windfall tax to March 2030, was an unwelcome surprise.
With inflation set to ease in 2024, I forecast a couple of interest rate cuts, which would stimulate the national residential market by reducing mortgage rates and improving buyer confidence. Base rates fell in August and November, benefiting the residential sector. However, the Autumn budget has sent inflation in the wrong direction and must cast doubt over cuts in 2025.
How did the property market fare in 2024?
Office: Despite the strong finish to 2023, it was a slower start to 2024, but the market rebounded in Q3 and Q4. Available Grade A space fell in 2023 to 2% and remained at that level throughout 2024 due to strong demand for quality space and a limited pipeline of new stock.
These factors also mean that prime office rents, which have been relatively flat for a few years, will likely increase in 2025. Lettings to OEG Offshore (16,591 sq. ft.) at The Stratus Building and to Sword Group (16,460 sq. ft.) at The Hill of Rubislaw show that demand for Grade B space was resilient.
Industrial: Demand for good quality industrial space remained strong in 2024, continuing the trend over recent years. High construction costs and challenging yields meant an almost complete absence, from the market, of new build industrial stock creating an opportunity for investors, willing to refurbish existing units, to take advantage of demand and benefit from increased rents in this sector.
Residential: The ASPC report for Q3 of 2024 showed a marginal annual decline (-1.0%) in house prices in Aberdeen to the date of the report. However, on the bright side, the volume of transactions completed, compared to the same period in 2023, increased by over 20%. So, helped by lower mortgage rates, activity increased during that period, even though the average price fell slightly.
So, what to watch for the year ahead?
Globally, demand for oil and gas is expected to increase in 2025 and recent forecasts are that Brent crude will hover around $74 per barrel. What that means for the local economy depends on the impact of Labour’s decision to increase and extend the windfall tax, combined with its policy to accelerate the move to net zero.
It is clear, however, that priority must be given to a national energy strategy, which includes a roadmap for a just, secure and sustainable transition. Time will tell whether the creation of GB Energy and the decision to headquarter it in Aberdeen is a step in the right direction. Locally, there remains much to play for in the energy sector and hopefully, as details of the transition emerge in 2025, there will be cause for optimism.
Inflation, interest rates and the cost-of-living crisis will have a significant impact on the national and local economy in 2025.
With the yield on UK government bonds, this week, reaching its highest level since 2008 and the pound falling, Labour is learning the hard way, post-Budget, that a government cannot tax its way to growth and much hangs on what it does next.
Whatever happens in 2025, the local, national and global political landscape will not be boring, particularly with (perhaps another surprise from 2024) Trump’s imminent return to The White House, who has not shied away from sharing his own thoughts on the UKCS and the UK energy transition.