S&P said the market was unlikely to improve for at least another two years. Any recovery would be delayed by the way the market has operated during the recession, with incentives equivalent to 50 per cent of rent being offered as inducements to take on leases. Such discounting had made the full extent of the fall in rents hard to judge, and would make it equally hard to perceive the start of recovery.
The first improvement in the market would be signalled by a fall in the level of inducements offered, rather than an increase in rent asked, which would not be included in published data.
The agency warned banks not to dispose of repossessed City properties at the first sign of recovery, because that would send the market down again.
But companies with high- quality properties in good locations and with creditworthy tenants on long leases remained secure. This category included Land Securities and to a lesser degree MEPC, whose long-term credit rating was A-plus, S&P said.
Current rents and yields could affect the credit rating of large property investment companies because of the impact on their balance sheets. But the most conservatively-financed could absorb the impact, and, by choosing not to sell property, could avoid realising losses.
The record vacancy rate of 20 per cent included older sub- standard offices which were unlettable and would eventually be demolished or converted to other uses. S&P also believes City offices are now much more competitive than those in continental centres.
Asking rents are down from pounds 65 per sq ft to pounds 37 and yields are a record 9.7 per cent. But S&P said reported yields were not representative as they reflected a high proportion of forced sales.