Prime London Office Values May Fall 20% This Year on Brexit

(Bloomberg) -- Central London office values will probably fall as much as 20 percent this year as the economy slows and investors are deterred by uncertainty in the face of the U.K.'s exit from Europe and increased business rates, according to Deutsche Bank AG's asset management unit.

Spending on properties in the British capital slowed sharply before and after the June 23 Brexit referendum as investors and occupiers shunned the market, Simon Wallace, head of research for Deutsche Asset Management Europe, wrote in a report Monday. He predicts the trend will continue this year, with values declining by 15 percent to 20 percent.

“The anticipated economic slowdown, in light of rising inflation impacting private consumption, will likely have a material impact on real estate occupier and investment demand throughout the remainder of this year,” Wallace wrote. “Furthermore, the future relationship between the U.K. and the European Union remains uncertain, weighing on business sentiment, particularly now that access to the single market is now in doubt.”

Investment in London offices fell 17 percent last year to 15.9 billion pounds ($19.5 billion), according to research complied by Savills Plc. Vacancy rates in the City of London, the capital's main financial district, climbed in the second half, Savills said. International businesses may move as many as 100,000 jobs out of London within two years of when the U.K. officially starts the process to leave the EU because of concerns that businesses will lose access to the single market passporting rights, according to Jefferies Group LLB analyst Mike Prew.

Tax Costs

All U.K. companies pay tax on the premises they use and the levy is based on the value of the real estate two years earlier. In April, the rate will rise for the first time since 2010 and soaring real estate values in London over the past few years means that the increase will be sharp.

“Central London is also heavily exposed to the latest revaluation of business rates,” Wallace wrote. “Many occupiers in the capital should experience a steep increase in occupancy costs and there will be a greater impact on occupiers in the City and the City fringe, where rents have risen a lot since the last one.” 

Values, which have already fallen as much as 10 percent since the Brexit vote, should become attractive relative to assets in other European countries in 12 to 18 months, when investors should prepare to re-enter the U.K. market as a recovery led by London takes hold and returns for prime properties in key locations outperform the European average, Wallace wrote.

“European real estate has provided investors with exceptionally high levels of return over the past few years,” he wrote. “However, we are now seeing signs that the market as a whole is starting to moderate. While yields may not yet have reached a trough, and further rental growth is certainly likely, countries such as Germany look to be entering the more mature stages of this cycle.”

To contact the reporter on this story: Sharon Smyth in London at ssmyth2@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Ross Larsen, Cindy Roberts