Townhouse accommodation is the oldest and most traditional form of office space in Edinburgh.
It is particularly popular among boutique financial, fund management and professional service sector firms who focus on townhouses in the traditional West End and the area between Charlotte Square and St Andrew Square.
Over the past ten years this market has been very popular.
Private investors, especially, have been highly active in the townhouse market, driven principally by the lot size of the investments created, typically between £500,000 and £1.5 million and values which are increasingly underpinned by the residential conversion potential of the buildings.
In addition, the listed status of the buildings means that, at least for the time being, they do not attract vacant business rates when they are available to let between occupiers.
With the demand for townhouses to be converted back to residential use, supply of these properties for office occupiers is slowly diminishing.
Consequently, rents are increasing, providing investors with growth potential in their assets.
Recent lettings in the West End townhouse market have created rental rates in excess of £22 per sq ft, with well-presented prime city centre townhouses capable of achieving rents in excess of £25 per sq ft.
Another attractive investment quality of townhouses is the almost constant level of demand.
The townhouse market is, in some aspects, more resilient than more modern Grade A and Grade B office markets due to the flexibility of the buildings and their ability to offer smaller occupiers a variety of options, ranging from small single rooms or multiple rooms and floors, to entire buildings.
Galbraith has recently completed the sale of 7 Walker Street, a full townhouse in the West End, on behalf of private clients.
The refurbished A-listed property, let entirely to a single office occupier, was sold to a private investor for £1.27m, reflecting a net initial yield of 4.92 per cent and a capital rate of £406 per sq ft.
The building benefited from medium term income while also offering the purchaser the longer-term option of residential conversion. The sale of such buildings highlights the yield compression seen in the Edinburgh townhouse market over recent years.
During the past five years, we have seen yields move from around 6.5 per cent to less than 5 per cent for the best quality stock.
Strong pricing and liquidity of townhouse assets is driven by property fundamentals such as micro-location and building condition, while top-end pricing is driven by competitive bidding situations or off-market exclusivity.
The benchmark vacant possession rate for townhouse properties has also seen considerable upward movement during the past five years, moving from around £175 per sq ft to over £300 per sq ft in prime locations, driven predominantly by the demand for residential conversions.
There has been a recent influx of foreign capital in the market, with the fall in the value of sterling supporting this.
The trend is also evident throughout the wider Edinburgh market, with overseas buyers dominating and in 2016 accounting for almost 80 per cent of all office investment transactions in the city.
The Edinburgh townhouse market offers investors a relatively secure option to invest in property with good income characteristics and long-term options.
Jamie Addison-Scott is a one
of the Galbraith commercial
property investment team in