london (Bloomberg) — Commercial rents in the UK probably will fall until 2012 as landlords lose tenants in the deepening recession, the global head of research at Deutsche Bank AG's real-estate asset management unit said.

"It's all pretty grim on the economic side," said Peter Hobbs of New York-based RREEF Alternative Investments, which manages 46 billion euros ($62 billion) of real-estate assets. "This will lead to three years of rental declines, starting from this year."

Rents for offices in central London fell 25 percent in the 12 months ended March 31, according to CB Richard Ellis Inc., as rising insolvencies forced landlords to cut rents for new tenants and offer bigger incentives. The vacancy rate rose to seven percent from three percent, the US broker estimates. Almost 5,000 companies went out of business in England and Wales in the first quarter, 56 percent more than a year earlier, according to the UK's Insolvency Service.

Owners of commercial properties in the UK incurred the biggest losses since the 1970s last year. To attract tenants, some landlords are offering as much as two-and-a-half years rent-free on standard 10-year leases, 12 months more than in the first quarter of 2008, CB Richard Ellis said.

The drop in rental income, combined with stricter loan terms, has made commercial real estate less attractive and caused values to plummet 41 percent since June 2007.

"We are a long way through the correction" of 60 percent in investment returns that RREEF expects for UK commercial real estate from the peak, Hobbs said in an interview at a London conference run by the Urban Land Institute research and education group. "We are moving into what should be a great vintage for investing," he said.

Hobbs expects London office rents may drop as much as 50 percent, with space in the most expensive buildings falling to $53 a square foot in the City of London financial district from $106 at the market's peak in September 2007. Rents there will pick up "strongly" by 2012 or 2013.