London’s office market is “highly overvalued” and set for a correction, ratings agency Fitch says
A leading ratings agency has said London’s overvalued office market is set for a correction next year due to Brexit uncertainty.
Fitch Ratings said the core London office market had cooled since the Brexit vote last year, but it remains “highly overvalued”.
“Tight office supply has supported prices to some extent, while sterling’s weakness has caused a recent boost in overseas demand for trophy assets, allowing City office yields to fall back slightly in 2017,” it added.
However, uncertainty associated with Brexit is “likely to see the cyclical correction resume during 2018”, and “longer term, the potential for rising interest rates presents considerable downside risk”.
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The news comes after shares in workspace company IWG tumbled around 30 per cent yesterday after it warned profits would be lower than previously expected.
Property transaction volumes rose this year due to the record-breaking overseas acquisitions of two of London’s huge towers: 20 Fenchurch Street, better known as the Walkie Talkie, for £1.3bn, and the Leadenhall Building, aka the Cheesegrater, for £1.2bn.
Fitch said purchases were being funded by “significant” foreign equity rather than debt, partly in response to the slump in the value of the pound since the EU referendum.
Another factor propping up prices was that property developers were taking a cautious approach to new developments, Fitch said.
“Brexit creates longer term uncertainty over the UK’s macro-economic performance,” the report said.
“A recession causing a relatively even reduction in corporate earnings would broaden and deepen the fall in rental value, and could cause a reversal in capital flows and a freeze in bank lending. This could see 10 per cent – 20 per cent rapidly written off market values across central London offices.”
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