London office rents set for 10-year hibernation

By William Kemble-Diaz and Sinead Cruise

LONDON (Reuters) - Office rents in London's key financial districts will not grow in the next decade, said a senior banker on Tuesday, who saw prime commercial property values in the UK falling by another 20 percent.

"In my view we're not going to see any rental growth in the City of London and Canary Wharf from peak rents in the next 10 years," James Brent, global head of real estate banking at Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), told the Reuters Global Real Estate Summit.

Even London's West End -- comfortably the world's dearest business location and a relatively less cyclical office market favored by hedge funds -- was vulnerable as the full effects of a global credit crunch and financial job cuts were felt.

"It would be totally extraordinary to claim the West End is not going to be impacted by the fairly sharp slowdown in the financial sector," Brent said.

"I don't see any rental growth in the West End at the moment. I see clear indications of rental decline."

Citigroup's investment banking clients include Land Securities (LAND.L: Quote, Profile, Research, Stock Buzz) and Hammerson (HMSO.L: Quote, Profile, Research, Stock Buzz), two of Britain's biggest office landlords and developers.

London office buyers would need to be compensated now for the likely loss of income growth in the future because the scale of layoffs in investment banking had been understated, Brent said.

"Investors will need to recognize that real estate in these areas is a nominal rather than real return asset and increase their initial yield requirements accordingly," he said.

Property yields measure rental income in proportion to a building's capital value and move inversely to price. On London City offices they have already risen by about a full percentage point to 5.5-5.75 percent since last summer's peak.

That pricing adjustment was barely half-way through though, Brent said.

"You are looking at basically another 100 basis points on prime yields... and that's probably about another 20 percent fall (in values)," he said.

According to benchmark data from Investment Property Databank, UK office valuations have already fallen by almost 18 percent from their bull market peak last summer.

Brent said the number of layoffs in investment banking had been understated, a day after people familiar with the situation in New York told Reuters that the U.S. bank was set to cut thousands of trading and investment banking jobs this week across its global business.

The fallout from financial sector downsizing for office landlords in a key financial hub such as London was assuredly negative because it would be difficult to let new space while space already let had the potential to find its way back onto the market, he said.

According to research from property services firm Drivers Jonas, about 7 million square feet of new office space under construction in the City alone and will be available to let by the first quarter of 2011.  Continued...