Love thy tenant
The IPD last week held its first Income Seminar in London, at which it heard views on the risks and advantages relating to income in the UK property market. While falling capital values have put fresh emphasis on the importance of income returns to property investors, the current weak economic climate is leading to increased risks to this “normally stable” component of return, the IPD notes.
As landlords struggle to incentivise tenants to take space and to renew leases, and thus to avoid vacancies in their portfolios, net income from commercial property in the UK has now declined for three years in a row – for the first time since IPD records began.
“For the moment property remains competitive because of its income, but landlords are finding it an increasingly hard grind,” said IPD head of research Greg Mansell. He pointed out that leases are now a third of the length seen in 1993, while the amount of tenants operating a break clause has risen to 40% from 20%. “Even more serious, at expiry only 10% of leases are re-let immediately with new paying tenants,” he added.
The seminar discussed leasing strategies in detail and also the risks surrounding lease expiry. It was noted that demand is considerable for long-leased assets, which is pushing up values, while investors remain unwilling to put their money into the discounted secondary property sectors in the UK in the currently risk-averse environment. Dan Batterton from Legal & General Property said it had become extremely expensive for many investors to buy secure, long-term income.
Most leases signed during the past year have been short, with the average for a new lease now below five years. Mark Disney from CBRE noted at the seminar that this movement towards shorter lease lengths had been driven by occupiers seeking to avoid unexpected cost shocks.
“At the moment, a lease expiry for a retail tenant is literally a chance to mark to market. And at lease expiry landlords have to ask themselves, can they let it for more? If not, then the tenant is going to make life difficult, because essentially, it comes down to supply and demand, and at the moment the tenants can get away with it,” he noted.
In this climate, relationships between landlords and tenants have taken on even greater significance, with co-operation and understanding seen as essential in securing future income. As Andy Martin from Strutt & Parker concluded: “Love thy tenant, because the relationship between matching income and meeting the demands of the occupier is of primary importance.”
