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The value of London offices needs to fall by almost a third before transaction volumes return to long-term average levels, according to new data.
MSCI said in a report, 2023 Trends to Watch in Real Assets, that London office prices would need to fall 29.3% from October 2022 levels in order to bridge the gap between what sellers are asking for and what buyers want to pay.
“Investors in commercial real estate are focused on the opportunities that will come from a repricing of assets as a period of easy money comes to an end,” MSCI wrote.
The office market has been particularly hard hit as the changes in the financing of assets are compounded with uncertainty around future demand in key global centres like London and New York, it added.
“Sales activity has fallen in these key global centers as potential buyers are unwilling to pay yesterday’s cap rate for an acquisition and will want to underwrite every worst-case scenario for future office demand in any deal," the report stated. "Owners, by contrast, will be fixed on the last comparable sales, sometimes at price levels seen before the pandemic.”
New York values need to drop as well, but by a less steep 10.4%.
In terms of its methodology, MSCI said it calculates the disconnect on price expectations between buyers and sellers using a Bayesian, structural-time-series approach to determine the price adjustments necessary today to keep deal volume constant. The measure factors in historical trends in supply and demand for real estate investments.
The fourth quarter of 2022 was significantly worse than even the depths of the financial crisis in terms of London office sales, with just £365M of assets changing hands.
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