LONDON office markets are likely to see rental values fall by more than a tenth this year, according to the latest forecast from the economic analysts Experian Business Strategies.

Richard Yorke, associate director at Experian Business Strategies, says: "This is a reflection of the sluggish economy in the capital, which is expected to be the slowest growing region of the UK this year. In particular, it is a result of the shake-out in the city.

"Offices have led the current downturn in commercial property rents, and in London these are set to fall by an estimated 10.6 per cent in the current year, compared with 6.7 per cent nationally.

"By contrast, modest rental growth is forecast for offices outside the South East and the capital.

"From 2005, the outlook for office rents is expected to brighten as employment revives. This trend is supported by the prospect of a low level of building completions beyond next year, so that, after a glut in the current year, supply is expected to drop in London and the South East.

"The revival in office rentals will make the office sector the top performer in the commercial property market after 2006."

Experian Business Strategies' forecast shows that taking the commercial property market as a whole - shops, stores, factories and warehouses as well as offices - overall commercial rental values are expected to drop by 0.7 per cent this year compared with the previous 12 months. This compares with last year's 0.9 per cent decline - the first fall since 1994.

But much of the weakness is in the office market. Rental growth in the retail sector this year will be slower but still be positive (at 2.9 per cent), as will industrial property (+0.3 per cent).

There will be some recovery in rents next year in line with the expected upturn in economic activity and increasing demand for property, but Experian Business Strategies puts the rise at only 0.1 per cent overall.

Taking a five-year view, a sustained acceleration in rental growth seems likely. Rental increases are forecast to average 1.6 per cent a year between now and 2007, with shops and stores up by an average of 2.6 per cent a year. Office rents are expected to show average growth of 0.2 per cent a year over the same period.

Despite the weakness in occupier demand, investment interest has remained robust, with total property returns just short of ten per cent last year.

Total returns are forecast to decline to 8.9 per cent in the current year and to 6.7 per cent next year as equities become more attractive. This is partly due to investor frustration at the slow upturn in rents.

But taking a five-year view, an upturn is expected, taking returns back to double figures by 2007.