'The trend in prime office rents throughout the region remains firmly downwards,' says the index.

'It is a tenant's market and will remain so for some time,' says CB Richards Ellis associate director Michael Haddock.

'We expect rents to continue falling for about the next 18 months, but at a slower rate,' says Haddock.

The index shows European Union (EU) region office rents down 2% in the second quarter of this year, mostly a result of the decline of rents in Madrid and in most German cities. There were very few locations where rents rose to offset these falls; the only rises were in Dutch and UK provincial cities.

'This fall means that rents are now 4,8% lower, on average, in the EU than was the case a year ago,' says the report.

Its researchers expect rents to continue to fall until at least the end of next year. 'Although demand should start to recover earlier than this, the build-up in vacancies will take some time to bring the balance back in favour of rental growth,' says the report.

The index shows rents also falling outside the EU region.

In Switzerland, rents in Zurich and Geneva have declined in the past six months, with a similar pattern in central Europe, the Middle East and southern Africa.

The researchers say that from 2004, 'our forecast shows strong rental growth starting to come through across almost the entire EU area'.

This is based on UK consulting group Business Strategies' economic forecasts, which forecast strong growth in both EU gross domestic product (GDP) and EU employment in 2003.

Forecast GDP growth in 2003 is 3,1%, compared to 1,5% in 2002, with employment growing 1% in 2003 compared to 0% in 2002.

'This economic growth will help to build up occupier demand, absorbing excess supply and generating rental growth,' says the report.

Most locations are still experiencing high levels of development completion, a legacy of the strength of the letting market in 2000. The areas expected to generate the highest rental growth in the next two to three years are Paris and Brussels.

The report says many European markets experienced a slight recovery, with higher office take-up during the second quarter of this year compared to two previous quarters.

This was particularly notable in Madrid, where take-up was the highest quarterly total recorded since the end of 2000.

The researchers say it is easy to overstate the importance of this recovery.

Leasing activity was artificially low in the past two quarters as a result of the September 11 terrorist attacks, so any increase in the second quarter might look more significant than it is.

Many of the transactions completed in the period under review were deals that had been in negotiation for some time and which had been held back while occupiers reconsidered requirements.

'Nevertheless the increase in transactions in the second quarter does suggest that the letting markets will be more active in the second half of the year than had been feared,' says the index.

Business Day