London’s offices continue to be overvalued as a result of low supply and a weak pound brought on by Brexit, according Fitch Ratings.
The credit ratings agency said the core London office market has cooled since the UK’s EU referendum but remains highly overvalued.
Fitch said 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.
But uncertainty associated with Brexit is likely to see the cyclical correction resume during 2018. In the longer term, the potential for rising interest rates presents considerable downside risk, Fitch said.
Fitch said office values began to fall just before the June 2016 EU referendum, but it explained that property transaction volumes have risen this year on the back of the record-breaking overseas acquisitions of 20 Fenchurch Street, which was sold for £1.3bn (€1.5bn), and The Leadenhall Building which was sold for £1.2bn.
However, one possible reason that price falls have not been steeper is that property developers have taken a more cautious and flexible approach to new developments than in previous cycles, Fitch said.