^{Source: Savills Research / US Energy Information Administration}

During the year ending September 2015, the overall average sale price in Aberdeenshire was the second highest in Scotland, behind Edinburgh. The average price in Aberdeen City was the fourth highest, behind East Renfrewshire, over the same period.

Looking at the 10-year average for the overall residential market, values are 24% higher in Aberdeen City and 19% higher in Aberdeenshire, compared to 11% for Scotland as a whole.

Furthermore, prime values in the Aberdeen area are 34% higher than they were in 2007, the peak of the Scottish market. This compares to a drop of 22% for Scotland as a whole. Despite the recent turmoil, monthly residential rental prices in Aberdeen remain the highest in Scotland.

Prices

There was a fall of 2% in Aberdeen City and 4% in Aberdeenshire in mainstream prices during the third quarter of 2015, compared to the same period last year. Prime values in the Aberdeen area have dropped by 9% over the same period, with properties in rural locations most affected compared to city locations. Rental values in Aberdeen City dropped by 7% over the same period.

Transactions

The biggest impact has been felt in the volume of sales. During the year ending September 2015, the number of residential sales in Aberdeen City and Aberdeenshire fell by 5% and 11% respectively, compared to the same period last year.

Despite these drops, there are some sections of the market that have bucked the trend. These include properties between £300,000 to £400,000, which have witnessed a slight annual increase in sales of 5%. Our analysis of new build developments shows an increase in the number of properties currently available between £200,000 and £300,000. This includes first time buyers, professionals and young families who are continuing to benefit from the comparatively lower rates of taxation and mortgages.

Prime

The surge in prime activity across Scotland ahead of the introduction of LBTT (Land and Buildings Transaction Tax) in April 2015 pushed the annual number of sales up by 10%. However, this was not the case in the Aberdeen area, where the number of prime sales fell slightly to 669 during the year ending September 2015, compared to 678 during the previous 12-month period. This suggests the market was further constrained by uncertainty within the oil sector.

Prime activity has been further compounded by higher levels of taxation as a result of LBTT, with the number of sales dropping by 44% to just 202 between May and September this year, compared to 362 over the same period last year. Unlike the rest of Scotland, the top end of the Aberdeen market above £750,000 has remained relatively active, particularly in recent months as it begins to adjust to the challenges of LBTT. This is especially true for hotspots such as Aberdeen's West End, where equity is driving this market. There were 14 second hand sales above this level in the AB15 postcode hotspot between May and September this year, compared to 13 over the same period last year. There were five sales recorded above £1 million in the Aberdeen area during August and September this year, which was equal to the number over the same period last year.

Looking ahead

Assuming a subdued level of oil price, we expect a further adjustment next year in prime (-10%), mainstream (-3%) and rental (-4%) values across the Aberdeen area (see Figure 2). In the event of an increase in oil price, we will witness a quicker recovery in residential values over the next five years. Despite current challenges, the residential market is underpinned by a lack of supply in the city hotspots and this will help protect values in these established residential neighbourhoods.

Aberdeen has gained a reputation for its quality of life and top-performing educational facilities. Furthermore, the area will become better connected through the construction of the much-needed Aberdeen Western Peripheral Route and improvements to train connections to Inverness in the long term.

^{Source: Savills Research} 

Development

There is no doubt that housebuilders in Aberdeen are approaching new land purchases with caution at the present time. Unlike residential sales, the length of time taken to complete land transactions means the prices being recorded today bear little resemblance to what is actually occurring in the current market.

The outlook for both sales prices and rates of sale for new homes is proving difficult to predict, and the risk to the housebuilder is therefore significantly increased. Whilst housebuilders will attempt to allow for incentives and future pricing when assessing land values, the best way to factor in the increased risk is to raise their profit margins.

Whilst most might have accepted a margin of 20% historically, there is anecdotal evidence that many are moving towards 25%, or even higher. Raising the profit margin by just 5% can have a significant and detrimental impact on appraisal land values, potentially reducing them by some 20 to 25%.

^{Source: Savills Research}

^{Source: Savills Research}

Elsewhere in Scotland

There has been a notable drop in activity since the start of LBTT, with the number of prime sales (above £400,000) recorded between May and September this year falling by 23%, compared to May and September 2014 (see Figure 5).

^{Source: Savills Research}

There have only been 33 sales in Scotland above £1 million, which is 57% lower than the same period last year. As a consequence of reduced activity at the top end of the market, the total LBTT revenue generated between May and September 2015 was 25% lower than SDLT revenue generated between the same period in 2014 (see Figure 6).

Edinburgh remains the hub of Scotland’s prime market, accounting for 37% of prime sales between May and September this year. This was followed by Greater Glasgow at 18% and the Aberdeen area at 16%.

According to the Savills Prime Residential Property Index, prime values in Scotland remained stable during the course of 2015. We are beginning to see prime values absorbing the turbulence of recent political and taxation challenges and begin the road to recovery, led by the city locations.

There was a 1% annual increase in overall Scottish sales during the year ending September 2015, compared with a 19% rise during the previous 12 month period. The slowdown was mainly due to tighter lending conditions following the introduction of the Mortgage Market Review (MMR). However, market growth is spreading to secondary locations that were previously lagging. These include West Dunbartonshire, Glasgow City, North Lanarkshire and West Lothian, where the annual growth in transactions was higher than the figure for Scotland as a whole. This is mainly due to an increase in housebuilding, coupled with attainable prices.

^{Source: Revenue Scotland / Savills Research}

Outlook

The market in 2015 and beyond

■ The Aberdeen area regularly tops quality of life polls. Further planned infrastructure improvements will enhance its reputation as an attractive location to live and work.

■ However, prime values above £400,000 will need to reduce by 10% next year in order to restore normal trading conditions.

■ Developers will be looking to increase profit margins to guard against risk and this will negatively impact land values in the longer term.