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Flexible response to tenant troubles

25 August 2011

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 IPD.

The review highlights the almost three tier office market emerging, 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, "While 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 ERVs."

"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 55.0% 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 has brought to light the increasingly flexible incentives and lease lengths that landlords have been using to avoid vacancies and protect their income streams. 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%.

Liz Peace, Chief Executive of the British Property Federation, said: "The issues facing our high streets are extremely complex with recession, structural changes caused by the internet and consumer preference all in play. In such times of change it is important that leases adapt."

"Today's data clearly shows landlords are increasingly flexible and retail property leases continue to adjust to economic conditions, with leases that are shorter, offering breaks and substantial rent-free periods to help new shops to get off the ground.

"During the last early-90s recession, there were legitimate claims from the retail community that the 'institutional lease', which commonly was for 20 years plus, with upward only rent reviews and no breaks, was inconsistent with many retailers' needs. The property industry has significantly changed the variety of its offer and I don't think that is always well recognised."

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