Average length of commercial lease reducing

Lease Lengths of Commercial Properties hit all time low

An annual study of commercial property tenancies recently carried out by Investment Property Database (IPD) and the British Property Federation has shown that there has been a dramatic fall in the length of leases on commercial properties over the past five years.

The survey, the biggest of its kind in the United Kingdom, sourced their information from over 100,000 industrial, retail and commercial leases and found that commercial lease lengths have dropped to just 4.8 years compared to 6.2 years in 2007. That’s a drop of 1.4 years.

Leases for Small and Medium-Sized Enterprises (SMEs) are now, on average, just 4.1 years long. In 2011 just 2.1% of new leases granted for SMEs were for up to 15 years, 19.2% of new leases were for up to 10 years and 78.3% were for under five years in length.

A reduction in the length of leases was also seen by high street retail properties which were an average of 9.7 years in length back in 2007, dropping to 7.7 years and then again to the current length of 7.6 years, a difference of 2.1 years in length.

32.9% of retail leases for under five years benefit from rent free periods as do 35.5% of industrial leases of under five years which may be one of the reasons why businesses are opting for shorter lease lengths.

However, another reason for such high demand in shorter leases, without a doubt, is due to the recession and occupiers simply aren’t willing to commit to longer term leases, opting instead for the ‘stop gap’ lease until they see how the market pans out.

Chief executive of the British Property Federation, Liz Peace, was quoted in saying “In these uncertain times it’s understandable that occupiers are looking for shorter lease lengths. The long term trend has, for quite some time now, been towards shorter leases but this has been accentuated over the past 12 months by economic circumstances”.

Although we can see that the market is continuing to deliver a variety of leases, with short term for SME start-ups and longer term leases for office and retail occupiers with more certain and stable futures who wish to benefit from a good deal in return for their commitment, it is the longer lease which not only brings the security of income but also helps the industry raise much needed finance for other developments.

Long term leases are invaluable for supplying the growth and development of our economy. The challenge being posed for the industry with this current trend for shorter leases is being able to maintain that security of income which comes with a longer lease and avoiding voids.

IPD’s Senior Research Manager, Greg Mansell, stated that, due to the ‘double dip’ back in the recession, it has become an increasing struggle for landlords to let out their commercial properties and they are finding it necessary to accept shorter lease lengths to enable themselves to secure a regular, albeit short-term, income to help offset their own short-term liabilities.

In the past 4 years the average length of commercial leases has been less than 6 years in length.

The increase in shorter lease periods is prolonging the uncertainty in the investor market and, whilst shorter lease lengths do provide the landlord with the opportunity for achieving possible higher rents with future occupiers, currently this is resulting in a lack of growth in property value.

However, despite the effect shorter lease lengths are having on property values, these short term leases are enabling businesses across the board to access the market more easily and its times like these when they need that the most.

The full findings of the survey will be released tomorrow at the British Property Federation Annual Conference.

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May 10, 2012