London office values to fall by 38 per cent in next 2-3 years: Report

The value of office spaces in London may drop dramatically in the next two to three years aswork from home and downsizing of the company workforces get underway, investment bank Citi said this week.

In a note to clients on Monday rating office landlord giant Land Securities, Citi’s real estate analyst teamsaid that "recessionary impacts on higher unemployment and continued work-from-home office shrinkage"will drive down office values in the U.K.’s capital by 38 per cent.

“We estimate historical levels of London office unemployment and a work-from-home estimate of 26 per centof space loss spread over 15 years. This drives our vacancy rate estimates up 6 percentage points,” the team said in the note.

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Land Securities has reportedlytaken an approximate 60 per centhit to the valuation of its retail property and will drop a further 17 per cent, Citi's forecast said. Reports said that it is a question of when, not if, the recession will impact the commercial property sector.

“Once the down cycle has been triggered – which we believe occurred when rates crossed into recession driving territory through and post the summer of this year – it then comes to the decision of how deep and for how long,” Aaron Guy, the team leader of Citi's analyst team that gave the estimate, was quoted as saying byMarket Watch.

Guy added that office block landlords will have to decrease rents by 43 per centover the next four years and in past economic cycles.

Responding to the rent decline, office blocks will have to sell for over 40 per centbelow than current market values to make an “investible return” in a deal today, the note said.

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In the next decade, the team added that the commercial property sector could see a 32 per cent recovery in rent values as the “nature of a downturn” means some stimulus into the economy will put a time limit on rent declines.

“As we stand today, we would expect the length of the downturn to be tied in large part to how long it takes for inflation to decline,” Guy said.

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