London office prices need to fall by 29.3% to drive transaction volumes back to normal activity levels, according to MSCI.
This stark price adjustment estimate is based on an historical analysis of supply and demand trends and reflects the fact that investors in many parts of the world are being forced to re-evaluate their rationale for commercial real estate investment in the face of growing costs of capital.
Outlining their predictions for 2023, MSCI Research executive directors Will Robson and David Green-Morgan said: “Deal volume is falling globally as investors reassess this investment opportunity. 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.
“Sales activity has fallen in these key global centres 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. Owners, by contrast, will be fixed on the last comparable sales, sometimes at price levels seen before the pandemic.”
MSCI estimates that a 10.4% decline is needed for New York offices to drive deal volume back up to normal levels.
Robson and Green-Morgan said income would be the main driver of investment returns in 2023, requiring owners to focus on rental growth, occupancy, and operating costs.
“Without the tailwind of compressing yields, returns will be driven more by occupier-market fundamentals, which, for office markets, are at a structural turning point,” they said.
On a positive note for action to mitigate climate change, MSCI expects climate risk to be seen increasingly as a financial reality, rather than an abstract concept as we move through 2023.
Its study of prices paid for offices in London, Paris and Sydney, has already shown that a premium has emerged for buildings with sustainability ratings from organisations such as the Building Research Establishment, GBC Alliance and National Australian Built Environment Rating System, versus those that have not yet achieved these standards.
It now expects actual building emissions to begin to impact values.
“Reducing a building’s emissions is how the industry will eventually effect real positive change; therefore, the greater risk to a building’s value implied by high emissions should start to be accounted for during the valuation process because of the transition risk,” the report says.
MSCI expects the threat of write-downs to asset value will push owners to make the changes to reduce a building’s emissions intensity. “It also means that when these assets come to market, they will do so at a price that accurately reflects the level of capital expenditure required to bring them up to standard, whether these climate-related upgrades are imposed by legislators or through changing market preferences,” the report adds.
To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews
