London Offices Set for Bust Then Boom, Deutsche Bank Saysby
Prime offices in capital to face biggest Brexit consequences
Expects London values to start rebound near the end of 2017
Central London’s best offices may lose as much as 30 percent of their value by the end of next year before the U.K. bounces back to beat continental Europe for the rest of the decade, according to Deutsche Bank AG.
A decline in U.K. commercial-property values will accelerate in 2017, with parts of the London center seeing a much sharper drop than the average of 10 percent to 15 percent, the German bank’s asset management unit said in a report on Thursday. Simon Wallace, head of alternative asset research at the unit, said the fall could reach 30 percent.
The capital’s business districts are among the most vulnerable because of increasing supply, high rents and the risk of reduced EU market access after the Brexit vote, according to the report. While the Deutsche Bank unit is maintaining an underweight position on London property that it has held for more than a year, it’s now recommending investors start preparing to re-enter the U.K. market by the latter part of 2017, focusing on the best buildings in central locations.
“Historically London tends to re-price quickly,” Wallace said in an interview. While there is still much uncertainty around negotiations with the EU, “long term we think London will remain an exceptional market.”
A slowing U.K. economy will prompt a drop-off in construction starts, which together with loose monetary policy should result in a total return for central London offices bouncing back from 2018 to 2020. The total return, which includes both rental income and changes in value, should rebound to about 10 percent a year over the period, according to the report.
The total return on U.K. commercial property fell 0.2 percent in August, according to MSCI Inc. That followed a 2.4 percent decline in July, the biggest since the global financial crisis.