UK leases become more flexible in difficult market: IPD

Lease structures in the commercial property sector have reached an unprecedented level of flexibility, according to the BPF/IPD Annual Lease Review, 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 the Investment Property Databank (IPD).

The review suggests there is a three-tier market emerging in the UK: prime London, secondary London, and the rest of the UK. 'On the one hand, prime properties in London have seen lease lengths increase, though thanks to increased rent-free periods - from 9 to 12 months - as landlords act to protect values and rents as much as possible,' continued Mansell. 'Secondary offices in London have seen quite a reduction in lease lengths and increased incentives, as landlords try to find tenants in a weak but improving occupier market and successfully maintain Estimated Rental Values.'

'Finally, across the rest of the UK, incentives have increased in an attempt to secure tenants in a still very distressed market, for instance the amount of leases with a break clause in the South East region rose to 64.2%, compared to 55% last year. But, as we know from IPD's UK indices, capital values remain in decline and regional offices still have to overcome some negative inertia.'

In the retail sector, where lease lengths and structures have been under attack from the Portas review, the report reveals the increasingly flexible incentives and lease lengths that landlords have been using to avoid vacancies and protect their income streams. About 34% of new leases for high street shops now include a break clause, and an average rent-free period of 10 months on a rent-weighted basis. While inflation has risen 94% since 1989, rents for standard shops have only increased by 24%, and in real terms have fallen 37%.