Leases set to get longer

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A number of factors in recent months could lead to the return of longer leases for occupiers. In his final Budget as Chancellor, Gordon Brown decided that the rates relief on empty properties was to end.

Whereas empty industrial property was given 100 per cent rate relief if it was not in use. That has now been abolished. Under the new provisions due to go live in April 2008, there will only be exemption for six months and then it will revert to the full charge.

This means that landlords and those occupiers looking to assign a building, will have six months to find a new tenant or incur extra costs and at 43p in the pound that could be a hefty bill to shoulder.

According to Knight Frank, this move will mean companies incurring an additional £900 million in rate charges, but for those looking to secure space it will mean rents are likely to be very competitive and there will be plenty of bargains and bargaining to be had.

But not for long. Andrew Gent of Gent Visick says: “There is likely to be a knee jerk reaction from landlords to seek out occupiers for buildings and potentially short term leases will be considered especially if supply still outweighs demand but as supply reduces then long term attitudes will harden.”

The property industry has warned that the removal of empty rates relief will halt the development of speculative warehouses with the result that there will be little new stock ready for immediate occupation further down the line.

Brian Birtwistle of DTZ warns: “I think you will see instances of landlords of old industrial complexes going straight for demolition rather than doing them up or trying to secure short term leases, with the result that older space will disappear from being available warehousing.”

In addition, the British Property Federation says: “Lease terms themselves are likely to be tightened because property owners will perceive the risk of 100 per cent empty property rates and seek to protect themselves from its impact.”

While the effect of this can be seen to happen over a period of time the result of the recent ‘Credit Crunch’ in the financial markets has had a more immediate effect. There is no doubt that funding criteria has tightened and will continue to get tighter. Caroline Mills of Knight Frank says: “The Funds are being very cautious and at the moment unless there is a reasonably long term lease they are not interested whereas 12 months ago they’d be interested in leases of only five years.”

As a result, says Steve Moriarty of M3: “There is increasing pressure to insist on 10-year terms. When there was yield compression it was viable to do a five-year term but with an unexpected yield shift it’s just not viable to do five and three year break clauses or leases.”

Jeff Wilson of Wrenbridge Land says: “With yields moving out there is some upward pressure on rents and where that is not a viable course then there is pressure on five year breaks with the result that you may just get seven year or even straight 10 year leases.”

Toby Vernon of M3 explains: “The change in investment market means that shorter term leases have become less valuable than longer-term commitments because value of investment has reduced.

“The only way that could change is if rents were to increase dramatically. That would bolster investment value and therefore landlords could offer shorter leases.”

Indeed this is the view of Cris Maxim of King Sturge: “Lease terms are steady at the moment and the trend in the marketplace over the last five years has seen the predominance of five year leases or break clauses which ten years ago would have been inconceivable.

David Newman of Matthews & Goodman agrees: “The increased build costs [relating to Part L]are likely to be passed on to the occupiers, by way of higher rents and capital values to ensure a reasonable return is achieved.”

Increasing land prices is a nationwide fact and Robert Rae of North Rae Sanders says: The increasing price of land in these [Midlands] locations together with the stabilisation of yields is likely to drive rental growth in the future – Birmingham has recently seen rents increase from £5.50 per sq ft to £6 per sq ft.

Andrew Pexton of GVA Grimley concludes: “The liquidity and the adverse effect on values of a wholesale move out of property will prevent a fast withdrawal from this market. Yields and rents will alter to reflect this additional cost, but the fundamental basics remain. A developer and fund need to make a satisfactory financial return to invest in property and ultimately, occupiers need to make money operating from it.”

As far as Steve Lee of B-serve is concerned, the effect of the reduction in empty rates combined with the credit crunch will focus warehouse occupiers. “Where [are occupiers]going to get money from and this business about rates is just going to be yet another problem. So why invest in that risk? [They] should be investing on core business.”

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