Despite London’s continuing growth, values for the UK market as a whole fell by a further 0.3%, the sixth consecutive month of negative growth for the sector which has now seen a cumulative fall of 1.1% since November 2011.
Overall, total return for April remained positive, at 0.2%, but over the last six months values have fallen by up to 6.5% in the regional shopping centres sector and the South West office market is down by 4.6%.
‘Without the impact of London on returns, which remains the power house of the UK property market, the declines across the UK would be even more apparent. However, confidence in the Capital, and its ability to keep growing, should lend some assurance to the industry,’ said Phil Tily, managing director of IPD UK and Ireland.
‘Despite concerns regarding the sustainability of pricing, notably in the City office market, the capital remains buoyant. Values for City offices actually increased by 0.4%, their strongest growth since September 2011,’ he added.
Meanwhile, the largest independent study of commercial property tenancies has revealed that stop gap leases have driven tenancy lengths to a record low 4.8 years on average as landlords work in step with tenant requirements.
An increasingly polarised market has developed over the past year, with some long term deals on prime property, but also a tendency for some occupiers to opt for a ‘stop gap', rather than more medium term leases, according to the annual study by the British Property Federation and IPD.
It found that 76% of new leases signed in 2011 were for less than five years in length. Leases signed in 2011 averaged 4.8 years, a decline of well over a year compared to pre-recession levels in 2007. Lettings to SMEs are even shorter, at 4.1 years.
‘In uncertain times it is quite understandable that occupiers are opting for shorter leases. The long term trend has for some time now been towards a shorter lease, but this has been accentuated over the past year by economic circumstances,’ said Liz Peace, chief executive of the British Property Federation.
‘The market continues to deliver variety. Short leases for start up SMEs, but longer leases for retail and office occupiers certain of their future who will get a good deal in return for their long term commitment. The security of income that comes with a long lease helps our industry raise finance particularly for development projects and so there will always be a place for the longer lease to help support development and growth in our economy,’ she explained.
‘Anyone thinking of starting a business in the current climate will find some good deals in the market and the widespread provision of rent free periods, even on shorter leases, and also high incidence of break clauses, all reflects this,’ she added.
She also pointed out that the movement towards shorter leases poses a challenge to the industry to avoid voids and maintain security of income. Landlords that are continually investing in their buildings and focusing on customer service will be those that best thrive in this new paradigm.
Greg Mansell, senior research manager at IPD, said that the ‘necessary evil’ for landlords to sign a short lease to secure income to offset their short-term liabilities is increasingly becoming the norm.
‘Weak occupier demand, off the back of austerity cuts and the return to mild recession, has left landlords struggling to let their properties, and thus they are accepting ever shorter leases. For the last four years the average lease signed has been under six years in length,’ he explained.
But the implications for the future of UK property values are more complex. ‘While short leases give the opportunity for achieving higher rents in future lettings, this relies on a degree of confidence returning to the occupier market. Conversely, the prevalence of short leases prolongs the uncertainty in the investor market, the net result is a lack of value growth. Despite the impacts on values, shorter leases are making the market more flexible and accessible for retailers, office occupiers, SME's and large companies at a time when they need it most,’ he added.
