London office values are correcting at a faster rate than in most other European cities, reveals the latest data from BNP Paribas Real Estate.
The firm found that capital growth for London’s office sector declined by 17.1% year-on-year in the period Q2 2022 to Q2 2023 – a steeper fall than seen in Berlin, Dublin, Hamburg, Frankfurt, Milan, Paris and The Hague. Of the cities analysed, only Amsterdam experienced a larger correction.
With interest rates expected to peak by the end of the year, BNP Paribas Real Estate said the commercial real estate sector in London could be in the final stages of absorbing a price correction that began in Q2 last year.
Fergus Keane, head of central London investment markets at BNP Paribas Real Estate, said: “The London office sector is offering a very rare entry point for investors for either repriced core product, or those with the means to spend capex to reposition assets into the core market. For a decade, it’s been a seller’s market, and that’s now flipped, with buyers holding the upper hand, particularly if you’re an all equity player.
“There are some convincing positive aspects emerging for investors able to adopt a longer term view. However, this entry point won’t last long. Analysis of previous downturns shows yields can come in quickly when interest rates start to fall, and this is expected to come through in the first half of 2024. I expect this window of opportunity will be closing this time next year.”
He continued: “Some buyers and sellers are tempted to compare this market with the conditions we saw back in 2008, but today is fundamentally different. It actually shares more characteristics with 2011/12 on the ‘real estate cycle clock’. While debt has become more expensive, it remains available, and there is a lot more dry powder waiting to be deployed today.
“There is also much less distress in the market, and assets are coming to the market selectively. Lastly, the market is coming off a 10-year cycle of low supply, while occupier demand for the very best modern buildings remains competitive and this will continue to drive selective rental growth.
“These are compelling indicators for what’s about to come. Equity investors need to be serious to secure opportunities, examining opportunities now and early into the new year in order to be ready to take advantage of other buyers being forced to wait on the sidelines due to the high cost of finance. Market sentiment suggests yields could drift a little further by year end which I expect might represent the peak.”
