Short-term leases are hampering growth, especially in retail – IPD
The IPD has published findings of its research into lease lengths, showing that short-term leases can hamper growth in property value, with particular reference to the market for retail premises.
The analysis of lease lengths in the UK shows that signing a new five-year lease leads to a fall in value of around 1.8%, despite the property being let, the IPD says. In addition, properties with short-lease tenants (below five years) have seen much less growth year-on-year than those on longer leases.
Investors are seeking assets with secure, long-term tenants: investors that sign leases of 20 years or more can expect to see a boost in value of about 5%, and the IPD has noted a “considerable” increase in the number of these longer leases signed during the past year, as investors have offered lower starting rents in order to attract tenants on a longer-term basis.
However, the number of five-year leases has risen by 26% during the past five years, and now accounts for around 44% of the whole property market. Andrew Gerrity, client manager at the IPD, says: “As landlords have struggled to control vacancy rates they have shortened leases and offered more flexibility in an effort to let properties. This has kept vacancy rates relatively low, at about 8.7%, but it has not stopped values falling in a market that demands safe assets and tenants.”
Within the retail sector, short leases (under five years) now account for 32% of the market, up from 26%, which the IPD says is a sign of the continuing struggle that landlords are facing in order to keep retail premises occupied.
“Short leases in the retail sector allow more flexibility, but the impact on values is severe, and we cannot forget that 50% of the commercial property sector is invested in retail. Properties on five-year leases have lost about 39% of their value in the last five years, whilst those on longer leases have only lost about 18%.“ Mr. Gerrity adds.
“While the impact of vacancies on values is higher, landlords need to be aware than signing short leases is not necessarily a guarantee of value protection, and though it generates a higher yield initially, holding out for a tenant on a longer lease is more profitable in the long run.”
