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This report follows on from the DTZ Insight Quantitative Easing report (August 2013) and extends the analysis to assess how early and precipitative withdrawal of QE would impact on London and regional office markets.
In our base case, the orderly withdrawal of QE is accompanied by a steady recovery in the economy and rising GDP and employment which underpin higher rents. Investors will increasingly seek opportunities outside London, and regional office yields will edge inwards as a consequence. Conversely, London office yields are forecast to drift upwards from their current low levels, reflecting expectations of rising gilt yields.
In our early QE withdrawal scenario, an unexpected surge in economic growth in the near term is negated by precipitative asset reduction and interest rate increases. This chokes off the nascent recovery and results in much weaker GDP and employment growth, accompanied by higher gilt yields. London would be more adversely affected than other UK cities because of its exposure to weaker international investment and demand. Consequently, rental growth in West End and City office markets would fall back further than other UK markets.
In the scenario, half of the UK markets move from Hot to Warm, according to our Fair Value analysis. London’s West End and City office markets would see the sharpest deterioration in attractiveness, reflecting the sharp slowdown in rental growth combined with higher yields.
Source : DTZ (Groupe UGL)
