The value of London offices is set to drop dramatically in the next two to three years, as working from home and firms downsizing their workforce will keep demand for office space low, investment bank Citi says.
In a note to clients on Monday rating office landlord giant Land Securities
with a neutral rating, Citi’s real estate analyst team led by Aaron Guy said 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%.
“We estimate historical levels of London office unemployment and a work-from-home estimate of 26% of space loss spread over 15 years. This drives our vacancy rate estimates up 6 percentage points,” the team said.
Guy said while LandSec has taken an approximate 60% hit to the valuation of its retail property and will drop a further 17%, its London office portfolio hasn’t faced a similar situation yet. It is a question of when, not if, the recession will impact the commercial property sector.
“Once the downcycle 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,” he said.
Guy added that office block landlords will have to slash rents by 43% over the next four years and in past economic cycles, he noted that London office rents have declined over 40%.
Responding to the rent decline, office blocks will have to sell for over 40% below than current market values to make an “investible return” in a deal today, the note said.
In the next decade, the team added that the commercial property sector could see a 32% 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.
Starwood, Like Blackstone, Limits Investor Redemptions From Big Real Estate Fund
Deutsche Bank’s new office HQ in London sold for a 9% discount
Earlier in September, LandSec agreed to sell Deutsche Bank’s future London headquarters for a 9% discount from its March valuation.
It sold the office block, which is under construction and is expected to complete in Q1 2023, for £809 million ($985 million), equating to an approximate £90 million reduction.