(Bloomberg) — Offices in central London are set to decline in value by as much as 10% this year as the pandemic drives down demand for space.
Short-term demand for offices has slumped, with many companies’ employees still working from home after lockdown, according to Simon Wallace, co-head of alternatives research and strategy at DWS Group. That’s likely to push rents in the capital’s most expensive areas down by about 8%, denting investor returns.
“The disruption that we have seen is holding back take-up and a lot of companies will be taking a wait-and-see approach before leasing space,” Wallace said in a telephone interview. “The physical barriers to making a decision are quite evident.”
Workers are gradually beginning to return to financial hubs in Europe and the U.S. after offices were closed to slow the spread of the coronavirus. The U.K. government has encouraged people to go back to the office, though fears of a second wave and concerns about the safety and capacity of public transportation mean many continue to work from home.
Still, the scarcity of new developments in the city and higher returns for investors compared with government debt should see prime London office values stabilize next year before bouncing back in 2022, Wallace said.
“When you look at pricing in London compared to other parts of Europe and particularly compared to government debt, it looks very attractive,” he said.
The gap between low-risk government bonds and prime real estate yields is a key gauge for many pension fund investors seeking steady long-term returns. U.K. government debt yields have plunged since the advent of the pandemic, making buildings with long leases to high-quality tenants more attractive. Commercial property yields reflect a building’s value as a multiple of its annual rent, with lower yields indicating higher prices.
Logistics properties remain DWS’s top pick for U.K. commercial real estate returns over the next five years, followed by rental housing. Retail properties will continue to be the worst performer, according to a report published by the asset manager on Wednesday.
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