THE MARKET: LEASE ADVISORY & ASSET MANAGEMENT
RENT REVIEWS RESPOND TO BUOYANT LETTINGS MARKET
• BEST SPACE SEES INCREASED RENTS AT REVIEW • MORE THIRD-PARTY REFERRALS LIKELY AS TENANTS FIERCELY RESIST INCREASES • LANDLORDS SHOULD STILL BE ENGAGING WITH ASSET MANAGEMENT OPPORTUNITIES
A year ago we talked in this commentary about rent reviews approaching a ‘tipping point’ with greater upward pressure on rents in London’s West End strengthening the landlord’s rent review negotiating position.
In the intervening period that rental growth has gained momentum and that ‘tipping point’ has now been reached. It can now be said that as a general rule rents will see an uplift at rent review.
Whereas until comparatively recently reviews might have been achieving a £1-£2 per sq ft increase, we are now seeing the potential for reviews delivering many times that level of uplift.
Landlords are getting understandably excited about the increase in the capital value that a successful rent review will bring. Similarly, the progression in top rents should not be seen as being a signal that everything is moving up in parallel. There is not the same quality or quantity of evidence when you look at space of lesser quality.
So, somewhat paradoxically, at moments such as these in the property cycle it is even more important to seek expert advice at rent review. This is because there can be a disconnect between the perception of where rents are and what can be achieved at review, which can often be higher than the lettings market.
Accordingly, we are in something of a transitional period where the balance of power may have shifted to the landlord in certain situations, but not all. There will be an increasing number of reviews that are contested where occupiers think they still have a case for challenging a proposed uplift.
Taking reviews to third-party determination could be quite a high-risk strategy for occupiers, as although there is not a great deal of rental evidence what there is, tends to indicate fairly sharp uplifts. Even in a rising market, we have recently seen some third-party opinions which have favoured the tenant and will doubtless give some occupiers further conviction in their cases at rent review. However, again, this further demonstrates the need for expert advice as all it really shows in our view, is the dangers of a third-party referral.
Against this backdrop, landlords still need to focus on asset management opportunities. Much of our consultancy in this area involves getting space back to achieve vacant possession and upgrade space for reletting at enhanced rents.
So for landlords there is currently an asset management dilemma between the safer option of regearing an existing lease with a known tenant or to be more bold, take back control of the space, spend some money on it and go back to market. Specific advice should always be sought, particularly on the fixtures and fittings if a property/floor is taken back.
In any period of rental growth, there will always be concern as to how long it will last but given the current economic outlook and the supply constraints on space in the West End, it looks like we will remain in an environment of progressive rents for at least 18 months. On that basis there will be much to do with rent reviews, lease renewals and asset management.
CENTRAL LONDON LEASE ADVISORY & ASSET MANAGEMENT CONSULTANCY
ADDRESSING THE RAMIFICATIONS OF LEASE EVENTS SUCH AS RENT REVIEWS, BREAK CLAUSES AND LEASE EXPIRIES ARE CRUCIAL TO EITHER MAXIMISING RETURNS FROM A PROPERTY OR MINIMISING THE COSTS OF OCCUPYING IT. THE TEAM’S BLEND OF MARKET PERSPECTIVE, PROFESSIONAL KNOWLEDGE AND NEGOTIATION SKILL GIVES OUR TEAM A LEADING POSITION IN THE LONDON LEASE ADVISORY SECTOR WITH AN IMPRESSIVE RECORD OF ABOVE MARKET TRANSACTIONS.
A HOLISTIC APPROACH TO ASSET MANAGEMENT ADDS VALUE BY APPLYING EXPERTISE TO EVERY ASPECT OF A PROPERTY ASSET AND GIVING IT A DIRECTION WHICH WILL ENABLE IT TO MAXIMISE ITS FUTURE VALUE. WE ARE FREQUENTLY ASKED TO LOOK AT ASSETS AND CREATE FULLY COSTED AND DETAILED ASSET PLANS AS WELL AS PROVIDING MORE TRADITIONAL ADVICE ON RENT REVIEWS AND LEASE RENEWALS.
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