Commercial returns in Europe fall behind; UK leases get shorter

Posted On Monday, 11 June 2012 11:44 Published by eProp Commercial Property News
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Commercial property in the US, Canada, and Australia outperforms Europe in the first quarter of 2012; this as the UK market adapts with shorter lease terms in order to match business risk and flexibility requirements

Anthony De FrancescoThe latest IPD Australia quarterly index shows, for example, that investment in property overall returned 10.3% for the year ending March 2012.

The returns performance of Australian office property has seen a steady increase across recent quarters, rising from 10.1% for the year to June 2011 to 10.5% in the year to March 2012.

Commercial property in retail, however, has seen a marked decline: from returns of 10.6% in the year to June 2011 to 9.4% in the year to March 2012, aided by the ailing Australian high street.

"The moderation in returns reflects a generally soft macro economy, translating into weak net absorption for office space and weak retail turnover growth for retail shopping centres," said IPD managing director Anthony De Francesco.

But this still towers above overall UK business property activity, where the IPD’s latest monthly figures show overall falling capital growth. Total returns over 12 months show that, like Australia, office property is performing most strongly (7.7%), and that retail property is labouring (4.6%). But these growth figures still fall some way below the Oceanic market.

According to Mr. De Francesco, investors are remaining cautious due to the ongoing Eurozone crisis, and global property markets will remain restrained for the rest of the year

At the same time, "averages leases on commercial properties in the UK are set to get shorter and tenants are very much in the driving seat in negotiations with landlords", according to advisor Dan Smith, director of Newport-based M4 Property Consultants

He cites a report recently published by the British Property Federation and Investment Property Databank confirms average lease lengths in the UK commercial property market have fallen significantly to an average of 4.8 years.

The report shows that:

  • Average lease lengths have fallen from 6.2 years in 2007 to 4.8 years in 2011;
  • Lettings to SMEs are even shorter, at 4.1 years and High streets retail units saw a small reduction in lease lengths, falling from 7.7 to 7.6 years this year, however in 2007 this was 9.7 years.
  • In South Wales the average lease length here may be shorter still. The region has traditionally offered more flexible lease terms than other locations across the UK.
  • The majority of the stock is suitable for the SME sector, which has always demanded much greater flexibility.
  • In cities such as London, Birmingham and Bristol, multi-national companies are willing to sign longer term leases on substantial buildings in order to secure good deals, but this is not the case in ther UK markets such as South Wales.

This trend towards shorter leases has been happening for a number of years. However market conditions may have forced the issue yet further. Many landlords are realising that they need to adjust their aspirations in the current market.

They are willing to be a lot more flexible to help attract tenants to their properties. There is a lot of risk and uncertainty in business in the current economic climate and businesses need to ensure they have sufficient flexibility to deal with this.

Advisors are working with landlords to ensure that terms match the nature of business requirements. For example, start-up industrial units in Newport are being offered on monthly licence agreements to minimise risk for potential tenants.

Retail units on the edge of the Kingsway Shopping Centre are being signed on initial six month licences. All these allow businesses the flexibility to take the risk and set up or expand which is essential if the economy is to grow.

"Clearly, for businesses considering securing their first commercial property or those looking to relocate, now really is a good time to be in the market. Landlords are keen to secure tenants, are willing to offer incentives to secure tenants and, as confirmed above, and are willing to be a lot more flexible in terms of the length of lease they are willing to offer", concludes Smith.

Last modified on Wednesday, 14 May 2014 19:35

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