Record tenant defaults and sharply contracting lease lengths have hit landlords’ income hard, according to the 2013 IPD Lease Events review.
Landlords have lost 6.2% of their income owing to record defaults and insolvencies, while new leases on average now stand at just 5.8 years – the first time it has fallen below six years – down from 6.1 years in 2012 and a peak of 7.8 years in 2003.
The review, sponsored by the British Property Federation and Strutt & Parker, analysed more than 93,000 commercial property leases and 3,500 lease events across the UK, highlighting a decade of shortening lease lengths and growing rent-free periods.
It found that landlords are under increasing pressure to offer competitive terms and short leases, with more than 80% of those signed in the year to June 2013 for between one and five years. This compares with 75% last year – and represents a rise of 55 percentage points in 10 years.
Only 6% of leases signed last year were for more than 10 years, compared with 8% in 2012 and almost one-third in 2003.
The industrial sector has the shortest overall average lease length at 6.9 years, down from a 10-year high of 11.5 years in 2012.
The average was driven down by an increase in activity from third-party logistics providers signing short-term leases linked to the length of their contracts, after a lull in 2012.
In September, LG supplier Hi Logistics agreed a prelet on a 165,000 sq ft warehouse development at Prologis Park in Ryton, County Durham, which will be ready for occupation in spring 2014.
It was Prologis’ first deal under a five-year lease initiative launched in 2012 in a bid to offer rapid development and fit-out of new sheds.
Office leases, meanwhile, fell from 9.5 years in 2012 to 8.3 years in 2013.
The picture is brighter in retail, where the average length of leases increased from 10.3 years in 2009 to 11.6 years in 2013. The rise has been driven by retail warehouses, where leases stood at three to four years longer than the average across all properties owing to scarce stock and an occupier-driven market.
Strutt & Parker senior partner Andy Martin says new business models – and a range of specialist providers to cater for them – meant tenants could shop around for greater flexibility.
“In all elements of society the consumer is king, and the market has moved to provide the type of product that the consumer wants,” he says.
“Businesses are evolving, the churn rate is quicker, there is a lot of merger and acquisition activity – the corporates and the finance people don’t want to hold redundant assets on their balance sheets. And if they are growing as a business, they don’t know where they are going to be in five years’ time, let alone 10.”
Martin adds that the costs of shorter leases are largely falling on owners rather than higher rents for tenants, though in reality many stayed on past lease expiry, effectively paying longer-term rates for consecutive short-term leases.
All industry eyes will now be on whether this is a temporary shift to weather uncertain economic winds, or a sea-change in occupier mindsets.
chris.berkin@estatesgazette.com
