ARE Scotland's landlords ready to face up to market realities and
shake off their obsession with the traditional 25-year, upwards-only,
lease?
Landlords in this country have an arrangement with their tenants which
would make thinner-skinned investors blush. The deal is simple. Before
walking into your new office you sign up for nothing less than 25 years.
Every five years your rent will be reviewed -- but only upwards. You
thought that in a market prices went down as well as up? Forget it, this
is property and the landlord is king.
But that was then and this is now -- the king is being kicked
unceremoniously off his throne. When the market was short of property,
tenants acted like serfs and went along with the deal. But the market
has changed. Glasgow has around 1.5 million sq.ft of new empty space
hanging over the market. Edinburgh is stuffed with elegant, but
inefficient, New Town offices which nobody wants to lease. The
landlord's market which dominated the office sector for much of the
1980s has gone. The boot is on the other foot . . . and the tenants are
sticking it in.
Harry Reith of surveyors Edward Erdman says that his landlord clients
are coming under acute pressure from tenants before new leases are
signed. ''Over-supply has caused the tenants to call the tune,
particularly in London -- but we're now seeing more insistent demands
creeping into the Glasgow office sector,'' he says. ''Tenants are now
exercising their muscle and trying to exert pressure on the 25-year
lease and the upwards-only review.''
That's nothing less than lese majeste. The 25-year lease and its
upwards-only rent reviews are the twin pillars that have underpinned the
huge amounts of money that poured into property investment during the
80s. It's those two factors that attracted the waves of Swedish, French,
and North American investors into UK property. They came because those
same guarantees are simply not available in virtually any other property
market in the world -- in other countries, apparently, they take the
quaint view that investments are a risk and can go down in value as well
as up. With a guarantee of increasing income over 25 years, property
investment in the UK can be financed through long-term borrowings --
typically via 25-year mortgages.
Nice work,if you are big enough to borrow for it.
''People now want to see the 25-year lease broken,'' says Reith.
''Tenants are now demanding that the length of the lease be restricted,
or they are looking for break options after ten years. The landlords
hate it. The tenants are pushing. The battle is on.''
Reith says that he is convinced that there will be changes in the
traditional lease, although it is too early to be certain about how far
the changes will go. ''It depends on the length of the recession and the
state of supply in any particular sector -- but Glasgow central offices
and Edinburgh town houses are good examples of over-supply,'' he says.
That over-supply has already created victories for the tenants.
Landlords now accept that they will have to offer incentives like
fitting-out costs and offers of rent-free periods -- some of the latter
are getting so lengthy they are beginning to resemble rent-free eras.
Reith predicts that the next of the landlord's defences to be swept
aside will be the 25-year lease. More and more tenants will win break
options at ten years, he predicts. Landlords will resist it, but in
order to find tenants for their buildings they will have to concede in
many cases.
''But what I can't see is any real likelihood of a breakthrough on the
upwards-only rent review. It would be a sign of total desperation --
landlords will fight that one tooth and nail,'' he says. That's only to
be expected -- the value of a building is assessed on the rental income
it might expect to earn over 25 years. Introducing the possibility of a
decrease in rents would create a crop of coronaries among Scotland's men
and women of property. It would also introduce some market reality.
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