London's embattled office market is in "rental recession" as empty workspace across the UK capital's West End, City and Canary Wharf business hubs hits a 30-year high, analysts at Jefferies said, pressuring shares of several top landlords.
In a note downgrading Land Securities, British Land, Derwent London and Great Portland Estates, Jefferies has estimated a 20% contraction in London office usage due to post-pandemic hybrid working and tenants' growing preference for greener buildings in the suburbs.
"Retail was technology's first casualty and we think offices are next. Utilisation has shrunk and landlords are losing pricing power as tenants offload surplus space," the analysts said.
Property companies globally are facing a double whammy of sliding office occupancy and sharply higher funding costs driven by higher interest rates.
Real estate firms in several European countries - including Sweden and Germany - have come under strain.
Shares in major UK landlords have also slid this year close to lows seen in the aftermath of the country's tumultuous "mini-budget" last autumn.
In London, Jefferies estimated West End vacancies at 7%, with rates in the City and Canary Wharf at 10% and more than 20% respectively.
The tipping point for a rental recession - when rents start to fall - historically has been around 8%.
At more than £30 a square foot, Jefferies said rents achieved by warehouse landlord Segro at logistics park Park Royal were likely now higher than the market rate at Canary Wharf, home to major financial tenants including Barclays, JPMorgan and Morgan Stanley.
Long-term Canary Wharf resident HSBC recently announced it would relocate to a much smaller office in the City.
British Land said this week that Meta Platforms had surrendered one of the two buildings it had leased at London's Regent's Place, as tech companies turn cautious about office real estate due to prevailing macroeconomic uncertainties.
Land Securities, which hosts a capital markets event for investors today, separately said demand for its central London office portfolio remained "strong", with occupancy up to 96.9% over the first five months of the financial year.
The company recently sold off £2.2 billion of mainly mature offices let to single tenants, in a batch of disposals chief executive Mark Allan described as "very timely".
"Over the past year, we have been decisive in positioning the business for a higher for longer interest rate environment," Allan said.
Investors have been steadily losing confidence in the wider UK real estate sector, with outflows from property funds accelerating markedly in August, according to the latest Fund Flow Index from Calastone.
Investors have pulled £428m from their property fund holdings year to date, Calastone data shows.
"Investment market liquidity is receding on rent uncertainty and squeezing developer profits," Jefferies said.
"London REITs (real estate investment trusts) appear cheap but are probably not good value," it added.
