UK commercial property lease trends 2017
Recent research on lease trends and patterns in the UK commercial property market, carried out by MSCI Inc in association with BNP Paribas Real Estate, provides food for thought for landlords and occupiers alike.
The UK Lease Events Review 2017 finds that, based on a sample of more than 80,000 leases, new lease lengths average 7.1 years in 2017. This represents a slight 0.1 year decrease on the average lease length in 2016 and spelt the end of a steady upward trend in lease lengths since 2011.
Despite the small margin, the reversal in the trend towards longer lease terms is coupled with evidence of a decline in the overall proportion of leases of 10 years or more. Medium term leases, of between 5 and 9 years, are becoming more prevalent. At 40.9% of all leases granted in the total sample (up from 15% in 2011), the share of medium term leases dwarves that of leases of 15 years or longer, which has declined from 6.2% in 2011 to 5.1% today.
This shift hints at a more cautious approach on the part of occupiers, who may be looking for greater flexibility and to avoid long term commitment, particularly in the current uncertain political and economic climate.
The research also shed light on the impact that key commercial lease terms can have on the property market. By way of examples:
• Break clauses were found to have become more frequent in leases of all lengths, now being included in just over 40% of leases. However, the use of the break clause was found to be relatively infrequent, at 32%.
• 31% of tenants chose to renew their leases at the end of the lease term, with only 17% relet to new tenants. The research found that the impact of lease renewal on rent value varied significantly between sectors. For those units immediately relet to new tenants, offices achieved higher rents in 75% of cases, while retail rents fell in 58% of cases.
The shift from longer term to medium term leases, with tenants increasingly looking for more flexible terms, coincides with the stabilisation of tenant default rates, which are reported to have continued to decline since 2012 and are now only marginally higher than pre-financial crisis levels.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Philip Mundy