A dour, but steady, recovery is underway in the Scottish commercial property market, reflecting the slow progress of the economy. The view from Ryden is that the industrial sector has experienced the shallowest decline and, while demand for offices is reduced, it is steady. The lack of new development is putting a floor under the market.

CB Richard Ellis notes that the revival in the final quarter of 2009 "lost some pace in the first quarter of this year, although still displaying strong total returns of 5.5% with capital growth of 3.8%." The good news in the analysis is that office rents were flat in January-March after declining in the final quarter.

The agent added that "surveys for Scottish business sentiment have been disappointing and in the first quarter the Lloyds TSB Business Monitor suggested that 47% of businesses reported a decline in turnover, while the Scottish Chambers of Commerce referred to a decline in confidence and activity.

It should be remembered that the weather was harsh in Scotland in the first few months of the year, and this is known to have hit the level of activity.

Sales and lettings of offices are running at only 75% of the long term average with the resilient performance during the recession owing a lot to a number of substantial deals in Glasgow.

The market is waiting for economic recovery to lift the performance.

The West of Scotland has been less affected by the decline in the industrial market than other parts of the country. Ryden said: "The prospect of market recovery including rental performance and investor interest is encouraging developers in some locations to start preparing proposals for new industrial schemes. Occupier demand remains healthy for units smaller than 929 sq.metres (10,000 sq.ft.) but with fewer deals at the larger end."

There should be no surprise, therefore, that investment in industrial property has been strong with returns last year double the rest of the UK.

A planning application to redevelop a ten acre site in Inverurie town centre has been lodged with Aberdeenshire Council. An application for planning permission in principle for the first phase has been lodged by Knight Frank for Ferguson Modula, which has outgrown its current site and is building a new complex at Midmill Business Park, Kintore. The mixed use scheme on the brownfield site calls for 150 homes, a supermarket, retailing, business units and offices. Knight Frank's Allan Rae said: "We believe that the project will provide a range of benefits for businesses and residents of Inverurie to ensure long term development of the town centre."

Having lain largely empty for some years, the 20,167 sq.m. WaverleyGate has now been sold to Highcross for around £30 million. The office was part of the Castlemore Securities' portfolio which went into Administration in February 2009 Highcross' Mark Evans said "WaverleyGate offered an attractive opportunity to acquire a signature office building, which is bucking the current market trend." Another property in administration is in Market Street/Cockburn Street, which is adjacent to Waverley station, and is on the market. The former Edinburgh District Council site could be developed with seven offices totalling 11,148 sq.m. which has already received planning permission. Alan Creevy of Jones Lang LaSalle said: "This really is a world class site in terms of location across from Princes Street Gardens and virtually adjacent to the station with its 16 million passengers a year."

Matrix Property Fund Management has sold its 4,105 sq.metres (44,185 sq.ft.) Station Hotel, Ayr through Drivers Jonas to a private overseas investor who will keep it as an hotel. David Frame of Drivers Jonas said: "With its proximity to Prestwick International Airport, Ayr racecourse, Burns attractions and the many great golf courses, the hotel is an excellent location."

One litmus test of the West of Scotland industrial market is the pace of lettings and development at MEPC's Hillington estate. So far this year five of the seven units at The Arc have been let, suggesting to MEPC "that the local office market may be starting to move again." The latest letting of Unit 6 is to FES FM Ltd following on from lettings to Ceridian (who took Unit 5 in addition to Unit 4 which they already occupy), Positive Solutions, and NES UK Ltd. Only Units 2 and 3 remain available. MEPC's Grant Edmondson said: "This is a good effort in a difficult office letting market." He considers that a key factor in at least 2 of the lettings is the fact that the units were already fitted out and MEPC now plans to fit out Unit 2 in the same way, allowing companies to move in quickly. Edmondson said The Ark, "is an outstanding development for smaller organisations with bigger ambitions."

The mood in Edinburgh is lightening as the office market eases itself out of the recession.

"The first quarter was better than anticipated," said Craig Watson of Jones Lang LaSalle, "which was helped by a couple of substantial deals, 5,111 sq.metres (55,000 sq.ft.) to the Scottish Qualification Authority and 3,715 sq.metres (39,984 sq.ft.) to NHS West Lothian."

Broadly speaking, the demand is for smaller units but Watson said "the encouraging change is that we are seeing enquiries for larger units. There is also a broader ranger of companies, from IT to financial services, seeking space."

Looking ahead the market will become increasingly dominated by the fact that there are no new offices under construction and none are likely to be completed until at least 2013."That means a move towards a stronger landlord position away from the dominance of tenants," Watson added.

From that will follow a decline in the incentive packages which Watson noted will come back later in the year and have probably reached their peak now. Stewart Taylor of CB Richard Ellis is encouraged by the shorter time scale on deals and a growing awareness that new space will not come through for some years. "There has been increased demand for flexible space, such as at Heriot Watt Research Park."

"Confidence has increased in the financial and banking sector," added Taylor, "and with the prospect of a shortage of prime space they are holding onto offices." What is interesting is that the dire predictions on the fall out from the problems of the HBOS and the Royal Bank of Scotland have failed to materialise, adding further to the improved mood.

Equally as encouraging is that occupancy at Edinburgh Park has increased and is now up to 92%, said New Edinburgh Limited (NEL). The latest letting is to the technology company Agilent which has taken on enough space for an additional 200 staff.

NEL's Pamela Grant commented: "Edinburgh Park has reached another exciting stage and this surge in occupier activity is testament to its success. There continues to be a strong interest from new occupiers."

Properties from another bankruptcy came onto the market in Scotland through Knight Frank acting for Lloyds Banking Group and the Administrators, PricewaterhouseCoopers to Kilmartin. The office block at Castle Street in Edinburgh, John Smith Hall, a student residence, 200 St Vincent Street, a Glasgow office and Inshes Retail Park in Inverness have all been sold for a total of £51,100,000 million, well above the asking price of £45.5 million. Another former Kilmartin holding that has been sold is a 90 acre site at Stoneywood, Aberdeen.

The future of a major shopping centre has become uncertain because of the end of the fund that owns it.

In this case, it is the 39,018 sq.metres (420,000 sq.ft.) Overgate in Dundee, owned by the Lend Lease Overgate Partnership which is now discussing the future with three other investors.

The choice is to sell or go for increased rental income. A decision will be needed before the fund comes to an end in October, which could bring liquidation. At the moment the shopping centre is valued at £130 million.

Ryden said: "The demise of many former active Irish investors, coupled with the ongoing shortage of bank debt, has taken large numbers of active buyers out of the market, leaving gaps in demand for the retail property investment sector."

An active housing market is the scene setter for buoyant retailing and in the case of Scotland, that has been absent. The Council of Mortgage Lenders reported that house purchase lending in the first three months of the year was down by 33%. The total loans to homebuyers were 9,700 compared with 14,400 in the final quarter of 2009.

Bunzl, the distribution and outsourcing group, has leased Lear Group's 2,323 sq.metres (25,000 sq.ft.) warehouse at Imperial Park, Linwood. Richard Higgins of CKD Galbraith, who acted for Bunzl, said: "Bunzl were keen to move from their Barrhead base as part of a rationalisation of their Scottish operations. Imperial Park has excellent access to the motorway network, a good warehouse and importantly a secure yard."

While lettings have declined in Glasgow, the market is in surprisingly fine fettle with plenty of substantial companies seeking office space.

Two of the long standing requirements have now been satisfied at HF Developments' G1 office complex in St George Square.

The largest of these is the law firm Maclay Murray & Spens leasing 3,716 sq.metres (40,000 sq.ft.) on 31⁄2 floors, having been forced to pull out of a deal on the nearby Clarion when the National Farmers Union bought the property for its own use.

The other letting in St George Square was 1,951 sq.metres (21,000 sq.ft.) to the accountancy firm Ernst & Young, paying the same rent as the lawyers at £285.14 a sq.metre (£26.50 a sq.ft.). Cushman & Wakefield advised on both deals and said that takeup in Glasgow in the first three months of the year was 13,366 sq.metres (143,870 sq.ft.), about 16% down on the same period of 2009.

The NFU's insurance arm's purchase of the 6,968 sq.metres (75,000 sq.ft.) Clarion House for around £35 million from the German developer IVG and BAM Properties indicated its own positive judgement on the Glasgow market and also the current availability of prime properties.

According to Ryden, there are active enquiries for 46,434 sq.metres (499,823 sq.ft.) while supply has risen by 12% in the city centre with 50,719 sq.metres (545,948 sq.ft.) of Grade A available, or 3.5% of the office stock in the centre.

Among the offices being marketed by Jones Lang LaSalle (JLL) are two prominent properties at Aviva's 123 St Vincent Street and 22-24 and 25 Blythswood Square (Clydeport Properties). At St Vincent Street there are the second and sixth floors but there is apparently further space in the Grade A listed property that could provide a total of 8,361 sq.metres (90,000 sq.ft.). At Blythswood Square, where there is a refurbishment programme, the available space is in a variety of sized suites JLL's Angela Pirie commented: "We believe that 123 St Vincent Street is available to occupiers at an ideal time in the market cycle given the depleting supply of new build Grade A stock in the city centre, and particularly large floor plates."

Clydebank is emerging as a new office location with a number of new developments, notably the Titan Aurora House.

The emphasis is on space for start up and developing businesses, and at Titan these are provided in small suites. The scheme has attracted 19 companies, ranging from specialist engineering to IT and high tech firms. Aurora House has larger offices.

Claire Donaldson of Clydebank-Rebuilt, the urban regeneration company, said: "Clydebank now offers new offices on the River Clyde next to Clydebank College and within 20 minutes of Glasgow city centre and the airport."

Our system of Regional Assessors has allowed Scotland to maintain its regular quinquennial valuation of commercial property and new valuation notices were issued on 1st April this year. Revaluation is seldom welcome but the date at which values were set is April 2008, during the boom, and before values plummeted. Rate payers' concerns are compounded by the decision of the Scottish Government not to give transitional relief at this revaluation. This situation is very critical for many sectors of our economy, severely affecting the tourist industry for example, and we can anticipate rating surveyors inundating assessors' offices with clients' appeals.

While the rateable valuation for commercial property is proactive and understandable, the same cannot be said for the Council Tax, our domestic equivalent. Here the assessor decides which valuation band should apply to each dwelling in an area, based on the market value if sold on 1st April 1991. In the case of properties completed after this date the assessor has to place them in bands by estimating what the market value would have been in 1991. Current bandings range from hovels below £27,000 to mansions above £212,000. This is patently ludicrous and rebanding is urgently required, particularly as there has been extensive residential development in Scotland in the last 20 years.

There is no point in using a systembased on value if the values are not kept up to date. It is surely not beyond the ability of the Government with the resources at their disposal to tackle this issue.

There will obviously be some resentment but people have become accustomed to the Council Tax and a sensible re-banding would be understandable and might even allow local authorities to retrench during this difficult economic period.

The idea of Local Income Tax seems to have vanished into the long grass.