When it comes to commercial property investment, apart from the value of the bricks and mortar (i.e. the building), there is also the value of the lease in place. Leases in the UK are prized for being generally ‘institutional’ in nature, which implies having robust clauses e.g. full repairing and insuring obligations on the tenants and upwards only rent reviews. The length of leases has historically been another very attractive component part, being longer in nature than other European counterparts.
However, lease lengths in the UK have changed considerably. The average lease length has been reported by the latest BPF/IPD Annual Lease Review to be 4.8 years from 5.3 years in 2010. The report shows that over three-quarters of all leases are now five years or less in length, compared with 63% in 2010. If tenant lease break options are assumed to be taken up leases have shortened by three years since 2002.
Looking into differences in the sectors it’s interesting to note that despite a very difficult time for the high street, retail continues to attract the longest leases and offices are the only sector to record an increase in lease length!
All this means that weighted average unexpired lease lengths (WAULL) across portfolios have not diminished significantly. As an example, the WAULL on the Henderson UK Property Unit Trust has remained steady at around 10.5 years*. Striking a balance on lease length, tenant covenant strength, location, sector, rent and yield usually leads to diversification and in some cases a very short lease length is, in itself, a great opportunity to add value to an asset.
* Source Henderson Global Investors