London office value expected to drop by up to 30% post-Brexit

London's best offices may lose as much as 30 per cent of their value by the end of 2017 before the UK bounces back to beat continental Europe for the rest of the decade, according to Deutsche Bank.

A decline in UK commercial-property values will accelerate in 2017, with parts of the London centre seeing a much sharper drop than the average of 10 per cent to 15 per cent, the German bank’s asset management unit said in a report.

Simon Wallace, head of alternative asset research, said the fall could reach 30 per cent. The capital's business districts are among the most vulnerable because of increasing supply, high rents and the risk of reduced EU market access after the Brexit vote, according to the report.

While the Deutsche Bank unit is maintaining an underweight position on London property that it has held for more than a year, it’s now recommending investors start preparing to re-enter the UK market by the latter part of 2017, focusing on the best buildings in central locations.

“Historically London tends to re-price quickly,” Wallace said in an interview. While there is still much uncertainty around negotiations with the EU, “long term we think London will remain an exceptional market.”

A slowing UK economy will prompt a drop-off in construction starts, which together with loose monetary policy should result in a total return for central London offices bouncing back from 2018 to 2020.

Total return, which includes both rental income and changes in value, should rebound to about 10 per cent a year over the period, according to the report.

- Bloomberg