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Lease lengths for commercial property have fell to an historic low reports commercial property agent Prop-Search.
More than 80% of new leases signed in the year to June 2013 were between one to five years in length, according to a recent UK wide survey by IPD, a leading provider of real estate performance. The sheer number of short leases has meant that the average lease length - excluding breaks - has fallen to under six years for the first time, standing at 5.8 years. Less than 6% of leases are now over 10 years, compared to twice that only five years ago and more than 20% 10 years ago.
Samantha Jones, a Surveyor at Prop-Search, said: “A continued environment of tough trading conditions has driven down lease lengths and increased pressure on landlords to offer competitive terms to occupiers.”
The survey also showed that as well as shorter leases, landlords have had to incentivise in other ways in order to secure lettings. Rent free periods are now a feature of leases today, having become more common - across all sectors - in the downturn. Rent free periods for offices remain the longest at just over 12 months but increasingly have been a feature in the retail and industrial sectors too, although at a lesser rate.
Samantha adds: “The distribution of rent free periods is skewed towards shorter leases, perhaps compensating for a high rent charged for a shorter income stream. There are however distinct differences between the sectors.”
Rent free periods are being offered commonly on relatively short leases in the retail sector - perhaps to mitigate landlord's business rates liabilities - whereas offices buck this trend with more rent frees granted on leases of between nine and 12 years, than shorter tenancies. The lowest level of incentives offered has been within the industrial sector.
As the UK economy was seen to ‘turn a corner' in late 2013, - with a pick-up in employment, consumer spending and trade - the competition for buildings and locations that offer the correct pitch, location and configuration has increased. This will no doubt continue to lead tenants being offered less flexibility in their lease terms and a reduction in the allowance for break-options and inducements.
Samantha concludes: “It is the landlords' prerogative to try and minimise such lease events that might threaten their income in what remains an unpredictable economic landscape. However, the outcome is diverse - varying from property type, sector and location - with prime locations and quality buildings clearly outperforming, and leaving secondary locations and inferior buildings an ‘occupiers market'.
Further information or advice can be obtained from Prop-Search - Tel: 01933 223300 / 01604 492000 or its website: www.prop-search.com