The article below is paraphrased from the IPD and Strutt & Parker Lease Events Review 2012. Subscribers can download the full report here.
It demonstrates why buyers today a looking for properties let to blue-chip tenants with long leases, which is our specialist area - click here to view our blue-chip portfolio.
It also shows why it is so important that Landlords with leases approaching expiry or break, or with struggling tenants, must take professional advice in order to maximise their chances of guaranteeing rental income in the medium term. At Pride Management, we provide a range of services for Landlords including Lease Renewals, Tenant Negotiations and Change of Use applications, and work with several top surveyors and valuers to get our clients the best possible deal. Contact us for more information.
Magnitude of struggling UK occupier market revealed
The declining UK economy is taking a considerable toll on the tenants of the UK's buildings, as almost 60% of leases (weighted by rent passing) that expired by the end of last year were unable to be re-let by Q2 2012 – the highest level in the last decade.
Adding to landlord's difficulties, struggling tenants - searching for opportunities to find lower rents and rent-free periods in a bid to alleviate their short-term cash flow woes - are increasingly exercising their right to exit a lease early. 48% left their leases at break – again, the highest proportion in over ten years.
Rental values are still over 9% below their 2008 peak levels, and tenants, particularly in the office sector, are eager to take advantage of lower prices offered.
The effect on landlords' income streams will be considerable. Over the 12 months to June 2012, net income has grown by only 0.2%, while inflation was 2.8%, a result of the vacant leases and landlords slashing rents to let properties. Only 19% of leases that expired were renewed at a higher rent than previously.
The IPD/Strutt and Parker Lease Events Review measured over 93,000 across 2011 and 2012 to better measure the effect of lease events (lease expiries, break clauses, defaults and vacancy rates) on commercial property investor cash flows.
Landlord retail incentives working
The one bright spark of the report was in the retail sector, where the increased incentivisation of landlords, through lower rents, rent free periods and bespoke rental increases meant an unexpected 46 percent of retail tenants decided to renew their leases – compared to only 20 percent in the office market.
This comes despite another gruelling 12 months for the beleaguered sector – and which saw 6.3 percent lost in income through liquidations. Landlords have been increasingly cooperative in regards to the struggling high street. Rent-free periods average over eight months, while newly signed lease lengths, when break clauses are taken into account, are under six years. As a result, only 25 percent of tenants decided to break their leasing contracts when given the opportunity, against 57 percent in the office sector – a sign of the benefits UK landlords are providing.
Greg Mansell, head of research at IPD said “the struggling UK economy is making it extremely difficult for UK commercial property landlords to keep their tenants, and this has enormous implications for income streams – which are the life blood of the sector.
“Active management remains a challenge and one that no landlord can ignore. Understanding lease event trends is essential to constructing an informed asset management strategy, particularly for understanding the differences between sectors. Retail has produced more favourable metrics than offices and industrials, supporting the view that not all tenants are looking to vacate at the first opportunity and many still want to secure their current pitch for an extended period.”
Stephanie McMahon, head of research at Strutt and Parker said “Landlords are generally seeking to maintain their income streams and need to engage early with occupiers to understand if lease and rental negotiations can result in tenants staying in situ, or perhaps moving to another, more appropriate building, within a landlord's portfolio.
“Where tenants have vacated their space opportunities have arisen in some instances for landlords to seek change of use. London markets in particular have witnessed investors looking at attractive returns from residential and converting quirky, secondary office space into well located homes.”