KNOWLEDGE CENTRE

SCOTLAND Q4 09

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The following report utilises statistics for Q4 09 from officebroker.com, the UK’s leading independent broker of serviced office space, along with external reports to present findings on activity within the serviced office industry in comparison to Q4 08.

The report presents findings on the following key areas for Scotland*:

Supply of and demand for serviced office space - In terms of the number of enquiries, the size and shape of those enquiries and the number of placements

•New Serviced Office Tenants: - In terms of workstation prices and initial license length commitment

Using the statistics from these areas, a detailed overview of the serviced office industry in Scotland was compiled to provide a comparative analysis of the changes within the serviced office market during Q4 09.

HIGHLIGHTS

•14 new serviced offices added to the officebroker.com portfolio in Q4 09

Q4 09 compared to Q4 08:

•Enquiry levels decreased by -8%

•17% decline in new serviced office tenants (SOT’s)

•Workstations per SOT reached 4.2 – Up 25%

•Average workstation price dropped to £221.00 p/m from £292.00 p/m

•Initial license agreements increased to 7.9 months

SUPPLY OF SERVICED OFFICE SPACE

•14 new serviced offices added to officebroker.com portfolio in Q4 09.

•64 serviced office buildings were added to the officebroker.com portfolio during 2009, representing a 37% increase in the number of serviced office buildings available.

The total number of serviced office buildings reached 165 in Scotland during Q4 09. This peak figure followed the addition of 14 new offices being added to the officebroker.com portfolio during Q4 09.

Those 14 serviced office buildings added in Q4 09 were part of 64 buildings added during the entirety of 2009. These additions represented a +37% increase in the number of serviced office buildings available within Scotland.

As demonstrated by Fig.1 the influx of new serviced offices was continuous, but the sharpest period of growth occurring between Q2 and Q3.

The increase seen during the middle of 2009 coincided with prime rents on commercial property hitting a low of £26.00 psf in both Edinburgh* and Glasgow** according to reports issued by DTZ.

Such decrease could have contributed to an increase in serviced office providers seizing the opportunity to lease new buildings for conversion to business centres.

Securing a financial return on such investments would be dependant on a rise in both demand and average workstation costs, both areas that have decreased substantially in 2009.

The upward levels of supply slowed between Q3 and Q4 after sharper increases between Q2 and Q3. It is unclear what brought about this fading in the latter half of 2009, but with the +37% increase registered overall in 2009 it would appear serviced office providers have new space to accommodate any increased uptake that may occur.

DEMAND FOR SERVICED OFFICE SPACE

•Enquiry levels declined by 8% in Q4 09

NEW ENQUIRIES

The number of new enquiries for serviced office space declined -8% in Q4 09, a continuation of the downward trend recorded throughout 2009. Q4 09 did however represent the smallest decline in enquiry levels during 2009 with Q1 (-18%), Q2 (-17%) and Q3 (-9%) all showing higher rates of decline.

And while Scotland is not the only area to show a decline in this area, the addition of ever decreasing new serviced office tenants (SOT’s) and falling workstation costs, as detailed later in this report, suggests Scotland’s serviced office industry as one of the hardest hit in 2009.

NEW SERVICED OFFICE TENANTS (SOTS)

•-17% decrease in new serviced office tenants (SOT’s)

New SOT’s fell by -17% in Q4 09 compared to Q4 08. This overall decrease in SOT’s was the result of substantial drops in take-up throughout November (-31%) and December (-27%).

This decrease followed an increase of +21% in Q3 09, the effects of which appear to have continued through to October of Q4 which showed an +8% increase.

The -17% decrease positions Scotland as the only part of the UK to experience a reduction in the number of businesses entering serviced office space during Q4 09, with the average number of SOT’s increasing +39% throughout the rest of the UK during the same period. So why is Scotland so far behind the rest of the UK?

With its inherently recession and budget friendly nature, serviced office space is a traditional safe-haven for business start-ups and entrepreneurial enterprises, leading to the question; does the decline in SOT’s indicate a lack of entrepreneurial spirit in Scotland during this period?

According to reports by The Princes Scottish Youth Business Trust (PSYBT) this is not the case, having recently announced a 39% increase in the number of new business being funded during the final financial quarter of 2009.

So if there is evidence of the entrepreneurial being alive and well in Scotland, as the PSYBT would suggest, could the answer lie in the types of businesses being created?

AVERAGE WORKSTATIONS PER SOT

•Average workstations per SOT reached 4.2 – rising +25% on Q4 08

The decrease in SOT’s during Q4 09 coincided with a revival in the number of workstations being taken per new SOT, rising to 4.2 in Q4 09 compared to that of 3.3 in Q4 08, representing a +25% increase.

A rise in workstation requirements during Q4 09 heralded the first increase in this area during 2009, with Q1-Q3 having registered an average decrease of -36% on the figures recorded during 2008.

Analysis of Q4 09 shows that up-take in November (+82%) was responsible for the increase, with October (-7%) and December (-27%) both falling short of their 2008 levels.

This November spike disrupts the consistent pattern of decreased workstation sizes witnessed from Q1 09 right through to November Q4 09. As these types of SOT’s have proved few and far between during 2009, serviced office providers can take some comfort knowing that SOT’s wanting space in greater volume have reappeared in the marketplace.

SERVICED OFFICE SPACE COSTS

•Average price per workstation fell to £221.00 - Down 24% on Q4 08

During Q4 09 the average price per workstation fell to £221.00, a reduction of £71.00 per workstation from the Q4 08 cost of £292.00. This contributed to the -16% decrease in workstation prices experienced annually in Scotland during 2009.

A month by month comparison of Q4 09 reveals that average workstation costs have continuously fallen below Q4 08 levels. And while such a decline reflects a nationwide trend rather than an exclusive trend in Scotland, the levels recorded still show workstation prices in Scotland to be £37.00 behind the national average of £258.00 per workstation recorded for the same period.

Despite a continued shortfall on Q4 08 prices, the average cost per workstation did recover to within 2% of 08 prices in December of Q4, suggesting that this continued drop, while positive for buyers entering the market, could be petering out.

INITIAL LICENSE LENGTHS

•Initial license length commitment rises to 7.9 months

New SOT’s are signing initial licences averaging 7.9 months in Q4 09, equating to an increase of just under half a calendar month compared to Q4 08.

In light of the free-falling workstation costs of Q4 09, it could be reasonable to assume that tenants may have looked to take advantage, securing longer terms at more favourable rates. And, as the only area of the UK to experience an increase in the length of licenses being signed during Q4 09, it would appear that those businesses opting for serviced office space have done so.

With other areas of the UK experiencing an average drop of 2 months on initial license lengths, Scotland’s growth in this area suggests that commitment levels are higher amongst those businesses opting to enter serviced office space during this period.

SUMMARY

When taking into account all the information for Q4 09, the following key findings can be drawn:

•Enquiry levels continued to fall but recorded its smallest deficit of 2009.

•Scotland recorded a fall in the number of SOT’s - the only UK region to do so during Q4 09.

•Workstation sizes increased, demonstrating a return to larger requirements by Scottish firms.

•Workstation costs continued to fall and showed Scotland to be £37.00 behind the national average.

•Licence lengths increased, making Scotland the only area to record an increase during Q4 09.