Optimistic occupiers again taking longer leases

Ian Fletcher

Optimism among occupiers of the UK’s shops and offices is growing with new commercial property lease lengths hitting a six-year high, according to new research being released by MSCI today.

The IPD UK Lease Events Review, sponsored by the British Property Federation and Strutt and Parker, which analysed over 90,000 leases across the UK, said new property lease lengths rose to 6.8 years in 2014, their highest since 2008.

The research showed that landlords were offering occupiers better deals to avoid the risk of empty properties, with 49% of tenants choosing to stay in the same place rather than move – and over three quarters of those staying paying either the same or lower rent.

In further good news for the property sector, income lost through insolvencies fell to 4.7%, the lowest since 2010.

Overall, the average length of a newly signed lease declined to under six years during the height of the recession, as landlords scrambled to secure tenants. Insolvencies had led to landlords losing 6.2% of their income each year at their peak.

But economic improvements – and the ability to lock-in favourable terms - are leading to tenants signing up to longer leases.

Rental values for commercial property – a further indicator of demand from occupiers – have also risen, by 2.2% in the first three quarters of 2014 – more than double the 0.9% recorded for the entire year of 2013.

Rising rents and lease lengths are good news for landlords – who look to commercial real estate for its stable income yields – but they are still offering considerable incentives to tenants in a competitive lettings market.

Rent-free periods have risen in length to 10.1 months on average, up from 5.7 months in 2007 - a 43% increase.

Leasing conditions nevertheless varied considerably by sector and geography – particularly between office and retail tenants.

Offices generally saw a lower rise in lease lengths, due to the higher flexibility occupiers have in moving to new areas to take cheaper or incentivised space. Just 35% of office occupiers renewed their tenancy at the end of a lease.

The runaway West End office market bucked this trend, and remained the best market to be a landlord, with 100% of new-lettings done at a higher rent.

Retail leases saw the highest increase in length – from 6.4 to 7.7 years between 2013 and 2014 – a sign of the improving trading conditions for occupiers. It also highlights the importance of a prime pitch and the unwillingness of retailers to move elsewhere. Renewals hit 54% for retail tenants.

Colm Lauder, Senior Associate at MSCI, said: “Longer lease lengths and declining insolvencies will continue to bolster the appeals of real estate for investors looking to shelter from more volatile investments.

“As a barometer for the wider economy, commercial property is a strong indicator of sentiment. Demand for retail space reflects greater consumer spending while demand for office space highlights growth in enterprise.

“For investors looking to venture outside of prime real estate, having a detailed understanding of the underlying tenants and lease conditions will be vital in mitigating and understanding risk.”

Ian Fletcher, Director of Policy at the British Property Federation, said: “The results of the survey are very encouraging. Improved occupier confidence suggests that businesses are doing well, with even smaller businesses focusing on the future, which has positive implications for the wider economy. This, in turn, is good news for landlords and investors, who are benefitting from longer leases and fewer insolvencies.

“Record rent-free periods, however, suggest that we are still some way from seeing the occupier market return to its pre-recession strength. A corner has been turned and steady progress is being made towards recovery of our sector’s customers, with a climate for some good deals to be done.”

Andrew Martin, Strutt and Parker, said: “The shortening of leases over the past two decades represents a major structural shift – albeit it one that now appears to have found its floor. Understanding what occurs at a lease event is now fundamental to measuring both income potential and gearing possibilities , especially given that future technological shifts all point towards a future of ever more flexible and fleet of foot occupiers.”

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