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Deja Vu

Simon Toseland, a Director of Prop-Search

As a teenage boy, like many others, I was - and if i'm honest still am - fascinated with ‘supercars'. I used to avidly read all of the magazines dedicated to high performance sports cars - the stuff of dreams being priced out of reach for the vast majority, the play things of Rock stars and tycoons.

As the world's economy boomed through the start of the new millennium, ‘easy' finance brought these ‘dream machines' within reach of more and more people. Today, the cost of these supercars has now returned to a pricing structure that puts them back out of reach of mere ‘muggles', reinstating their dream status.

A similar story can be told of the commercial property industry.

When I first started working for commercial surveyors & valuers Wilson & Partners back in 1987, the majority of occupier enquiries/deals done were for leasehold properties. Renting a building was more common by far. The reality of owning a property was rare - pension funds/property companies, developers or local councils owned most of the commercial stock.

Again, as finance became more readily available and private pensions more common, with regulation changes being relaxed, more and more people and companies found that they could buy their business premises.

The recent collapse of the financial markets has effectively made commercial mortgages virtually impossible to secure - whether for property purchase or development. At the same time, we have seen building costs continue to increase as a result of more onerous building regulations (especially with regard to energy performance/sustainability), the cost of raw materials (steel) and other general development costs. Whilst land values have fallen considerably over the last four years, this has done little to compensate for the combined effect of the above.

The effect of all of this is that we have seen a gradual increase in the number of leasehold deals being transacted and the terms upon which leases are being agreed are becoming less tenant biased and more fairly balanced between landlords and tenants. As such, like the supercar analogy, we are beginning to see a return to occupiers taking longer leases rather than owning their business property.

Back in the late 80's and early 90s, it was not uncommon for tenants to take 25 year leases without break, or a break at 15 years and we are now seeing a gradual return to longer leases. In many ways, it makes sense - businesses used to adopt the view that their money was better invested in the business rather than the property it occupied and that a long term lease not only gave them stability but also the ability to assign their lease if required - trying to assign a short term lease didn't give the assignee much future stability - whereas taking on the remaining 10 or 15 years of a longer lease did.

During this period, when the market did begin to see growth, tenants even began to ‘trade' leases subject to premiums. Imagine you occupied a building where the open market rental value of the property was higher than the rent you were paying - in that case, you could ‘sell' your lease to a third party for the difference between the rental values.

If history continues to repeat itself, which let's face it, it has a habit of doing, then not only will we continue to see more long term leases being signed, but maybe even a return to premiums being paid.

As this cycle begins to evolve, funds will begin to buy back into the market, banks start will start to lend more willingly and on less prohibitive terms, and the commercial property sector will return to being a major part of the UK's financial make up.

They say what goes around comes around – your wife will be glad she kept those old shoulder pads...

I'm off to dig out my Filofax....


Friday, May 24, 2013