LONDON (Reuters UK) - London offices deteriorated faster than any other European property market in the wake of the U.S subprime mortgage debacle, a report issued on Wednesday by Moody's Investors Service showed.
The ratings agency said London had been hit hardest by the intense financial market volatility, which has already forced some banks in the City and West End business districts to axe jobs, slashing forecast take-up levels.
The report studied market conditions between mid-year and year-end 2007 in a bid to assess the strength of European office markets which underpin commercial mortgage-backed securities (CMBS) transactions.
Depending on the degree of stress on office rental markets in the short term, Moody's scored each market on a scale of zero (weak) to 100 (strong).
At year-end 2007, the overall weighted average composite market score was 61 but down from 64 at year-end 2006 and 63 at mid-year 2007, indicating relatively stable conditions across Europe as a whole.
The report also showed that Continental European markets -- with a weighted average score of 65 -- have on average outperformed the UK markets, which show a score of 47.
Office markets in Berlin and Hamburg both improved, rising to 68 from 65 and to 70 from 65 respectively. But Barcelona slipped to 30 from 46 in the study, reflecting tough conditions in Spain's office markets.
"Despite the financial turmoil, occupier demand remains relatively robust...however occupier demand could be negatively affected if the financial turmoil continues," said Rod Bowers, Moody's associate analyst and co-author of the report.
Moody's pointed out that the ratio of demand to supply shifted into negative territory in the period, from 0 percent at year end 2006 to minus 0.66 percent at year end 2007. This negative demand-supply relationship is likely to impact vacancy levels in the future, the study said.
"Currently, we regard the growing supply pipeline to be an important threat to the European office occupational markets and unless the current demand-supply imbalance is redressed, the overall balance could deteriorate further in 2008," said analyst Jeroen Heijdeman, who co-authored the report.
(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)
(Reporting by Sinead Cruise; Editing by Louise Ireland)
