March 26, 2003—The findings of a new research study illustrate the extent to which corporate occupiers are demanding—and getting—shorter commercial property leases.
The study by Nelson Bakewell and the Occupiers Property Databank show that the average length of new lease taken by a wide range of corporate occupiers has almost halved over the past 4 years dropping from 12.8 years in 1999 to just 7.7 years by the end of 2002.
Tim Asson Head of Nelson Bakewells Corporate Real Estate team commented: “Its been no secret that corporate occupiers in recent years have been seeking greater flexibility from their operational property and looking for shorter lease terms. However, these statistics—which have been drawn from the compilation of the Investment Property Databanks monthly index—demonstrate how much UK corporates are flexing their muscles and the extent to which landlords are responding.
The leasehold analysis shows that although lease lengths are falling, many corporates are still tied in to historically long unexpired lease terms. With some sectors contracting and new accounting standards bringing lease liabilities onto the balance sheet, this is bad news for many companies because of the adverse impact on the P&L.
The research also looks at the corporates who choose to own their property outright rather than lease it. By analyzing the Weighted Average Cost of Capital (WACC), used by corporates in determining their internal hurdle rate of return, and comparing it to the notional return from their freehold property, the study sought to identify whether it made good business sense for these businesses to own property rather than lease it.
In every private sector of business that the study analyzed, the comparative figures showed that it did not make clear financial sense to have capital tied up in property.
—Elliott Chase
Reprinted with permission; copyright 2003 i-FM
