Richard Gwilliam, head of property research, said values are already falling ‘very rapidly’ in the UK and could sink by as much as 35% in the current downturn before stabilising.

‘The UK is one of the world’s most liquid real estate markets and that goes hand in hand with greater transactional evidence and greater volatility,’ he observed.

‘Average UK capital values since the end of June to the end of October – the most recent monthly data we have – saw an overall 12% decline. In the single month of October it was almost 7%, the fastest monthly rate of average capital value decline on record.

‘So that’s a faster decline than during the GFC.’

Gwilliam said Continental Europe is seeing pricing falling, but not to the same extent and it is repricing more slowly. ‘There is more repricing to come though.’

While in the UK, M&G sees an increasing wealth of evidence that deals are being done at very significant discounts to where they were earlier in the year, in continental European markets, values have been falling, but slowly.

‘Partly it’s just playing catch-up with the actual prices that investors are willing to pay. Increasingly we’re seeing transaction yields there for deals that are likely to happen soon, and they’re 50, 75, 100 bps higher than where they would have been earlier this year.’

He pointed out that historically the UK has been a volatile market and Europe doesn’t tend to see as much volatility. ‘So we expect a lower amplitude of decline there’.

The other reason that the UK is experiencing deeper and faster value falls is that the Bank of England started hiking earlier in the UK, rates are higher and bond yields reflect this: ‘so UK 10-year gilts are over 100bps higher than German bunds. European interest rates are likely to peak at a lower rate than in the UK. So that is part of the story here.’

The interest rate story, with the real estate spread over bonds rapidly narrowing, explains why M&G Real Estate is working on the basis that capital values could plummet by 35% in the UK and by 20% in some European markets.

But, Gwilliam said, the rental side is likely to hold up better.

‘Supply going into this period generally in the occupational markets was pretty low; we had construction taking a back seat during the post GFC period and again during the pandemic.

‘Take up generally has been resilient, and the recession that we’re almost certainly in already in some markets and is coming in others is likely to be shallower than the deep one in 2008-2009. So rents will probably fall in many markets, but not by as much.’