Despite the downturn in the U.K. office property market, investors can still find attractive investment opportunities, said analysts at Fitch Ratings. Areas that have been of particular concern are the Canary Wharf and London city markets, which have seen weaker tenant demand and falling rental volumes as a result.

Fitch believes that the recent negative headlines focusing on rent levels in the lettings market are skewed to equity holders of property, and have had negative implications for CMBS transactions in the structuring and marketing phase.

"It's still very attractive for investors to get their hands on trophy assets in a good location," said Andrew Currie, an analyst at the agency. "It's not only the German funds that are particularly ... looking for high-quality buildings, but also Middle Eastern, private U.K., and Irish investors who have significant funds to spend are gearing up assets to increase their returns."

The central London office market is considered a key area in the U.K. and Central Europe region. According to Fitch, it accounts for approximately 22% of annually traded investment stock and offers the largest concentration of prime "institutional quality" property stock in the U.K. and Europe. It's split into four sub markets that include: the City, West end, Docklands and Midtown area. Looking at the market from an investor's standpoint - meaning the attractiveness of the property yields returned - the levels remain constant even in a period of downturn in rent.

The City has been most affected by the decline in demand, primarily because of its concentration in the financial service sector, Fitch said. Prime rents have declined between 30% and 33% from 2001 levels, when rents peaked to GBP62.00 toGBP63.00 per square foot. As rental demands decline, rental incentives have increased with rent-free periods extended from six to nine months at the market's peak, to more than two years for leases over 15 years. Fitch believes rents will continue to decline over the next 12 months to GBP40.00 per square foot.

The Docklands area also has experienced significant decline in demand, but much less in comparison to the City, principally due to the amount of property available. Peripheral locations feature less as credit tenant leases and struggle to achieve critical mass. "Canary Wharf is very well controlled by managers who are able to dictate the rental terms they are offering to tenants," said one Fitch analyst.

Properties in the West End have preformed better with much less supply overhang than in the city. Fitch said that this could be attributed to a much wider client base. Vacancy rates stand at 8.5%, and there are signs that this may improve in the future. Midtown office space also attracts a wide variety of clients, drawing from both the City and West End tenant bases. But levels here have declined by 33% from rental peaks in 2001; the vacancy rate stands at 9%. "There has been little grade A space available, and in the last property cycle it was affected the worst," said analysts. "[But the market is] more established than in previous market cycles and shows similar stability to the West End market."

Of the 16 CMBS deals that contain central London office properties Fitch only rated Coronis from the ELOC series. The problem with the transaction related to one loan with no exposure to the central London office market. "This market has been historically volatile and we haven't really experienced anything new," said one analyst. "What we have seen is what we basically expected and to a lesser degree it's what has come before."

The agency recognizes the volatility associated with the occupational market and has reflected the potential effects in its analysis of CMBS transactions whose underlying portfolios contain exposure to the office sector. But the volatility in this market is counteracted by the concentration of high-quality tenants and long lease terms. "Concerns regarding exposure to this market have been blown out of proportion," said one analyst. "These loans should be monitored but it's important to bear in mind the other features that mitigate this inherent volatility that we have seen in the past."

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