Rents in the south-east office market have fallen by 15% from their peak 18 months ago and probably have a further 18% to fall over the next two years, according to Knight Frank’s annual M25 office research.
Knight Frank said it expected rental values to fall by 11.1% this year and 7.5% next year, with no recovery until 2012.
Headline rents have already fallen on average by 15%, Knight Frank said, but net effective rents – taking into account rent free periods – have fallen by 25%.
According to Knight Frank, the severity of the falls suggests that the M25 market has seen the brunt of the decrease in rental values, so the decline may be more muted.
In the M25 market, it predicted rents will fall a further 9% on average by mid 2010 – but as the market is more stable than the last downturn and has less speculative development, it forecasts that the vacancy rate will remain below 10%.
It forecasted a recovery in 2011 or 2012.
The towns with the most supply, such as Hammersmith, Bracknell and Reading, may see the most activity, Knight Frank said.
Emma Goodford, head of south east offices, commented: ‘I believe occupiers aggressive negotiating stance, in this downturn, will mean they are attracted to those towns, and buildings, which offer the most competitive rental and concessionary packages. Therefore, in my view, it will be the oversupplied towns which will see most deal activity because more competition will sharpen terms.
‘The impact on net effective rents has and will be catastrophic this year - a net effective -25% fall from peak, but it will be more muted next year as we’ve reached the bottom fast and have already established a new Benchmark low for rents. By this time next year we’ll be through the worst.’
The investment market has seen an increase in activity and viewings, with 17 deals completed since the start of 2009 totalling £155m. A further £110m of deals are currently under offer. Most interest is coming from UK property companies, funds and private investors, rather than overseas buyers, Knight Frank said.
It also found that investors wanted to buy safe investments with long income, sound covenants and good locations.
Jeremy Waters, partner, investment, Knight Frank said: ‘There will be more investment activity in the M25 office market with buyers and sellers willing to commit. At the prime end, there will continue to be a strong requirement for income but in my view, the opportunity lies with multi-let prime. This type of product is now priced correctly and, although requiring more detailed analysis, will provide the most potential.’