(Bloomberg) -- Europe’s commercial property correction is gathering pace as higher borrowing costs begin to feed into valuations that have been slower to correct than those in the UK.

The value of commercial real estate in Europe fell 10.8% in the year through March, according to an index compiled by MSCI Inc. The UK by contrast recorded a 16% fall in the same period, with some landlords now seeing signs that the worst of the re-pricing could be behind them.

Triggered by the end of the cheap-money era, the drop in assets like office buildings, retail shops and warehouse space was faster than past crises, and landlords are seeing signs that rising rents and a lack of fresh supply are starting to lure buyers. 

“I would be disappointed if our valuations moved out much further,” said Graham Clemett, chief executive officer of London-based Workspace Plc, pointing to sustained rental growth. The pain has been real though. The real estate investment trust last month sold a portfolio of UK warehouses at a 27% discount to September book value. 

There are pockets of weakness. Goldman Sachs Group Inc. expects the London office market to deteriorate further as the segment adjusts to post-pandemic realities and new supply was on rents. 

“Sentiment toward owning office assets remains low,” analysts including Jonathan Kownator wrote in a note to clients, saying that deal activity in the sector has slumped near global financial crisis-era lows.

British Land Co., whose City of London tenants include UBS Group AG and TP ICAP Group Plc, last month marked down the value of its portfolio by 12%. The landlord was also demoted from the bluechip FTSE 100 index in May after its shares fell 35% in a year.

Past downturns, including after the global financial crisis, have taken about two years to fully feed through, according to data from Savills Plc. While that could mean more pain is coming if rates continue to rise, an upbeat scenario puts British property companies in position to take advantage of a rebound sooner than peers in neighboring markets. 

“While continental Europe has seen modest price declines, it is fair to say the UK seems some months ahead,” said Nick Harris, head of UK and cross-border valuations at Savills. The correction in UK property values is “the fastest we can recall.” 

Read More: A New Wave of Real Estate Pain Is Coming After European Rout

In markets like Germany, commercial landlords have been reluctant to sell into a shaky market and so a dearth of deals gives appraisers less evidence to reset valuations. But refinancing strains are growing. 

One of the biggest retail property companies in the Nordic region has seen its credit rating cut to junk status as a funding squeeze continues to reverberate across the sector. Citycon Oyj joined a growing list of so-called fallen angels within the region’s commercial property industry, including Swedish firms Samhallsbyggnadsbolaget i Norden AB and Fastighets AB Balder.

“We expect the operating environment for Citycon’s tenants to increasingly worsen as inflation bites into consumer’s spending power,” Moody’s said in a report. The rating company cited high leverage and rising interest expenses as reasons for its downgrade.

The UK’s price declines are also a reflection of the slower pace of hikes carried out by the European Central Bank compared with the Bank of England. 

“I would hope the worst is over for the UK,” said Sue Munden, a real estate analyst with Bloomberg Intelligence, adding when prices bottom out will ultimately depend on how “sticky” the high inflation rate is going to be.

Steep drops in UK valuations have been most pronounced in sectors where property yields compressed the furthest in response to hot demand. Warehouses were especially sought after due to the rise of online shopping during the Covid-19 pandemic. City of London offices have seen prices fall by 21%, according to Savills data. 

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The UK is “pretty close to fair value, but there might be a bit more downside as we see borrowing rates starting to go up again in recent weeks,” said Peter Papadakos, Green Street’s European research head. 

Over the past six months, rent increases haven’t been able to keep up with financing costs, putting pressure on valuations in the process. But as inflation gradually eases and central banks debate the end of the cycle of rate increases, the dynamic is starting to change, according to Mark Allan, chief executive officer of Land Securities Group Plc, which wrote down its portfolio by £848 million in the year through March.

“It feels much more finely balanced now,” he said. “But investment markets are still relatively thin in terms of transactions.”

--With assistance from Charles Daly and Joe Easton.

(Updates with Goldman Sachs forecast Finnish downgrade)

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