BPF/IPD annual lease review: ‘unprecedented flexibility’
The British Property Federation/ IPD annual lease review for 2011 shows that the average length of lease increased to 5.3 years in 2010/11, from 5.0 years in 2009/10, measured on an equally weighted basis and including the first break where applicable. The survey, now in its 14th edition, covers almost 102,000 tenancies including 10,236 new leases granted between January 2010 and March 2011. When excluding licences and short leases of four years or less, the average length of new leases (again including break clauses) rose to 7.6 years in 2010/11 from 7.2 years in 2010/11.
The increase in average lease length was evident across all sectors, after two years of consecutive falls. Lease lengths in retail and industrial property were at 5.7 years and 4.2 years respectively (on an equally weighted basis) while the office sector remained at a record low of 4.7 years. Weighted by rent, the average length of all new leases rose to 9.4 years in 2010/11, up from 8.6 years the previous year, when lease lengths were the shortest ever recorded by this survey.
Although 63% of new leases had a length of less than five years, on a rent-weighted basis these leases account for just 33% of all new leases. The survey shows that tenants occupying larger units still tend to sign longer leases.
Break clauses formed part of 31.1% of leases in 2010/11, compared with 29.4% the previous year. Break clauses became more common in leases of up to 15 years, but the proportion of leases of more than 21 years with break clauses declined to 19.9% from 31.1% “The proportion of leases with break clauses also mainly increased in the retail sector and particularly in standard shops (34% in 2010/11 compared with 3.9% in 1999), the BPF notes.
In terms of location, lease lengths remained constant in Central London and the rest of the South East while a further decrease was observed across the rest of the UK. Within the office sector, lease lengths further decreased in Central London and the rest of the UK whilst the rest of the South East remained stable. Within the industrial sector, lease lengths decreased slightly in Central London and Rest of South East whilst a slight recovery was observed in the Rest of UK.
Overall, rent-free periods increased to 13.4 months in 2010/11. The largest increase on a rent-weighted basis was in offices (+4%), followed by retail premises at +2.6% and industrial property at +1.0%.
The IPD says the review shows that lease structures in the commercial property sector have reached an unprecedented level of flexibility, as landlords continue to adapt to find new tenants, and maintain existing tenancies. “With the importance of income stream paramount in the current commercial property market, indeed the latest monthly figures showed capital growth to have slowed to 0.1%, it is not surprising to see that landlords have been flexible in their leases over the last year. The importance of incentives in the various suffering markets cannot be overlooked nor can the need for active management,” said Greg Mansell, Research Manager at IPD.
