Landlords face the challenges of active management
The IPD/Strutt & Parker Lease Events Review, which has measured more than 93,000 leases over 2011 and 2012, has concluded that struggling tenants are increasingly exercising their right to exit a lease early.
Almost 60% of the leases (weighted by rent passing) that expired by the end of last year were unable to be re-let by Q2 2012, the review has also found, which is the highest level in the past decade. Tenants – particularly office occupiers – are keen to take advantage of declining rental values.
All this is having a considerable effect on landlords’ income streams. In the year to June, net income only rose by 0.2%, while inflation was 2.8%, the review notes – the result of the vacant leases and of landlords cutting rents in order to let properties. Only 19% of leases that expired were renewed at a higher rent than previously, it adds.
The retail sector was the “one bright spark” in the review – in this sector, the survey found that landlords were increasingly co-operative and used rent free periods, lower rents and bespoke rental increases to retain tenants, so that an unexpected 46% of retail tenants decided to renew their leases compared with just 20% in the office sector. The IPD and Strutt & Parker note that this was despite another gruelling year for the retail sector, in which 6.3% in income was lost through liquidations.
The review shows that rent-free periods for rental leases average over eight months, while newly-signed lease lengths, when break clauses are taken into account, are below six years. As a result only 25% of retail tenants decided to break their lease contracts when given the opportunity – this contrasts with 57% in the office sector.
Greg Mansell, head of research at IPD, says active management remains a challenge and one that no landlord can ignore. “Understanding lease event trends is essential to constructing an informed asset management strategy, particularly for understanding the differences between sectors,” he adds.
Stephanie McMahon, head of research at Strutt & Parker, says landlords need to engage early with occupiers to understand whether lease and rental negotiations can result in tenants staying in place, or perhaps moving to another, more appropriate building within a landlord’s portfolio. “Where tenants have vacated their space opportunities have arisen in some instances for landlords to seek change of use,” she adds. “London markets in particular have witnessed investors looking at attractive returns from residential and converting quirky, secondary office space into well located homes.”
*** Investment research firm MSCI today announced that it is to acquire the IPD Group for around $125m. MSCI said the acquisition was part of its core strategy to provide investment decision support tools to institutional investors across all major asset classes. IPD chairman Rupert Nabarro said the deal, which had the “wholehearted support” of shareholders and staff, was key to the long-term success of IPD.
“Our aim has always been to make IPD a truly global provider of real estate data and analytics, providing trusted benchmarks for the industry and developing real estate as a global asset class. MSCI’s acquisition of IPD will help us reach these goals, while maintaining our real estate expertise and the well-established IPD brand,” he added.
