Real estate investor sentiment towards London’s office sector has markedly worsened, with predictions of a much steeper fall in 2018 rents than previously forecast.
According to the latest IPF European Consensus Forecasts of Prime Office Rents, City of London rates will fall by 3.9 percent in 2018, marginally worse than the previous prediction of 3.7 percent fall when the same survey was published in May 2017. The survey also predicted that London’s West End will see rents reduced by 3.6 percent, versus the 2.6 percent fall from the May report.
The research was based on a poll of real estate teams at 19 fund management groups conducted over six months ending October 25. Respondents bet that the U.K.’s decision to leave the European Union would spell tough times ahead for London landlords. “Uncertainty over the outcome of Brexit negotiations continues to exert a negative influence on the Central London markets,” the report concluded.
By contrast, those surveyed predicted rental growth in the prime office sector for all but one of the other cities in Europe. Polish capital Warsaw was expected to see a negligible decline of 0.1 percent in 2018.
The highest growth at 5.2 percent was expected in the Spanish capital Madrid. While strong, this is down from the 8 percent growth predicted in May. Amsterdam, Barcelona, Berlin, Madrid, Moscow, Munich, and Stockholm earned strong three percent-plus growth predictions for 2018. The expectations come after fund managers have spent much of the summer sounding the alarm at the growth in asset prices of real estate in Europe.
More recently, fund firms have warned that the U.K. government’s failure to secure a speedy transition deal in the Brexit negotiations has reduced manager’s appetite for England’s capital city.
[II Deep Dive: Commercial Real Estate Investors Turn Cold on London]
In an interview with Institutional Investor, Egbert Nijmeijer, senior portfolio manager at Kempen Asset Management, said the prospects for commercial real estate in London and Continental Europe couldn’t be more different. “In the U.K., uncertainty still exists due to the slow progress between the European Parliament and the U.K. government,” he said. “Europe is in much better shape. There are healthy growth rates, inflation is under control, and interest rates are staying low. If you look at real estate on the continent, there is very healthy rental growth and valuations are going up. Also, you have economic growth there to support the rental growth.”
The IPF report painted a similar picture when its investment panel were asked to look further ahead. The three-year rolling average growth rate forecast for the 29 non-London cities marginally increased from 1.8 percent in the May survey to 1.9 percent in the November survey.
But London was again predicted to buck the positive trend. Investors expect its three-year rolling average to be -2.9 percent for the City of London district and -2.6 percent for the West End. Both predictions are worse than the respective -2.5 percent and 1.9 percent growth predictions made in May.