The UK office property market is likely to face structural headwinds over the coming years as artificial intelligence (AI) adoption weighs on employment growth, according to analysts at UBS.
Predicting that office demand will be weaker over the next cycle than most investors and analysts currently assume, the Swiss bank was prompted to downgrade British Land Company PLC (LSE:BLND) to 'neutral' from 'buy'.
AI's impact on the labour market is building beneath headline data, said analyst Zachary Gauge, who sees early signs such as reduced entry-level hiring and a gradual slowdown in office-using employment.
“The optimistic view assumes AI-driven efficiency gains will be fully recycled into new, higher-value tasks, enabling firms to grow revenue quickly enough to sustain baseline employment growth. Our analysis challenges that assumption," said Gauge.
He questioned, for example, whether core industries such as legal and professional services could expand revenue fast enough to offset potential headcount reductions.
“If AI only raises efficiency but not the overall revenue ceiling of service firms, then its impact on office demand is likely to be neutral at best,” he said.
UBS added that although vacancy pressures may take time to build, market sentiment could shift well before fundamentals do.
The European office sector now trades at a 41% discount to net tangible assets (NTA), above its long-term average of 29%.
This does not fully reflect the downside risk from AI-linked job stagnation, the analyst believes.
As a result, UBS downgraded British Land, though only trimming its price target to 440p from 445p, saying the risk-reward is now “evenly poised".
The analyst highlighted that soft office-based jobs growth and emerging AI displacement trends were “likely to exert a net negative drag” on demand, justifying lower capital growth assumptions for both the City and West End portfolios.
Retail parks, by contrast, continue to offer resilient earnings potential, with UBS pointing to lease-up, like-for-like growth, and cost efficiencies as key drivers over the next 24 months.
Still, with the shares now closer to fair value, UBS concluded there is insufficient upside to maintain a positive stance.
British Land’s shares are trading at around a 30% discount to spot EPRA NTA.
UBS expects returns to be driven by modest NTA growth rather than any re-rating of the discount, with an average return on invested capital (ROIC) of 7.3% forecast versus a weighted average cost of capital (WACC) of 9.4%.