According to the IPD UK Lease Events Review 2015, commercial property lease lengths have hit an eight-year high as occupier confidence recovers.
The MSCI research, sponsored by Strutt & Parker and the British Property Federation (BPF), is based on an analysis of over 90,000 leases across the UK and reveals that new property lease lengths rose to 7.2 years in 2015, matching levels last recorded at the market peak in 2007.
Although there has been a recovery from the depths of the market in 2009, when the average new lease was for just six years, the shift to shorter leases is accepted as a ‘structural change’ and the trend for new lease lengths to increase to any significant degree is not expected to continue as occupier demand grows.
Despite this lengthening of the lease period, the key driver for many tenants is still flexibility, with 73% of total leases signed in 2015 for a term of between one and five years. Larger tenants, who pay the lion’s share of rent collected by professional investors, still opt for longer lease terms, with the proportion of shorter one-to-five year leases falling to 42% when weighted by rent.
Retail leases saw the greatest increase in length – from 6.7 to 7.5 years between 2014 and 2015 – a sign of the improving trading conditions for occupiers. It also highlights the importance of a prime pitch and the unwillingness of retailers to move elsewhere.
More than four out of ten (43%) of tenant chose to renew their leases when they expire. This is higher than the 17-year average of 38% suggesting that the market is beginning to experience more normal conditions.
The research shows that landlords are keen to avoid vacant space and were offering occupiers better deals to avoid the risk of empty properties, with 71% of tenants who had a right to break their lease in 2014 choosing to stay in the same place rather than move. This rose to 80% for the retail sector with tenants keen to protect their established pitch in a market where rents are generally rising.
Commenting on the findings of the review, Martin Codd, head of the property entrepreneurs group at Penningtons Manches, said: “These findings are no surprise to us as they are being replicated in the deals we are doing for clients taking space or renewing their leases. With the economy still growing and business confidence improving, we expect to see continued growth in the commercial letting market well into 2016 and beyond.”
View the full Lease Events Review November 2015.