UK property rental values are on “relatively sound foundations”, according to Capital Economics.
The company, however, said rents were “worryingly high” in London’s retail sector.
Central London retail rents are 25% higher than their previous peak and 41% above the level implied by their underlying trend.
Capital Economics did not rule out a “demand shock” for the wider commercial property sector.
“At the all-property level,” it said, “supply conditions have been constrained in most sub-markets, so the most salient risk is a post-Brexit fall in occupier demand.”
Acknowledging the uncertainty raised by the UK’s vote in June to leave the European Union, the company said signals about occupiers’ response to Brexit had been mixed.
Capital Economics cited Irwin Mitchell’s recent survey, which found that 93% of 250 property occupiers felt June’s vote would have no impact on their demand for space.
High rental levels are not on their own enough to cause a rental correction, Capital Economics said, adding that most rental downturns had coincided with a significant demand-side shock, such as a recession.
In most sub-markets, real rental levels have been on a downward trajectory over time and, for the most part, are not “unduly stretched”.
In the office sector, rents look more stretched in the West End than in the City, while limited net additions of stock should keep office rents from collapsing, Capital Economics said.
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