Spring in market sees rent reviews back in fashion

Tipping point now being reached and records are being broken

14 February 2018

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Accommodation in the commercial property market fills up quickly during the good times and South East Wales is no exception. It seems a long time since we were trying to find occupiers for industrial and office buildings in the great recession and wondering how to mitigate the holding costs of business rates, maintenance and insurance.

Since then, building values have risen and existing stock values have risen. Initially, rental values lagged behind with occupiers preferring to own their commercial premises rather than rent. This left developers and investors unwilling to take the risk of construction without the certainty of an end user.  As supply dwindles, demand for commercial property increases. Eventually the tipping point is reached and rental values take a sizeable leap upwards.

That tipping point is now being reached and records are being broken. New office space is being quoted at £28 psf and it’s not inconceivable we could see £30 psf in the medium future. Surprising when you consider we stood at £20 psf for almost a decade. The industrial market is no different, but exacerbated by a starker shortage of stock. With best deals now reaching £8 psf on the west side of Cardiff for properties with good frontage, and standard units consistently in excess of £5 psf, it’s official: rent reviews and lease renewals are back in fashion.

Tenants often avoid initiating a review in the hope that the landlord has overlooked it, but in my experience this is rarely the case. More likely, the landlord is buying time, settling another transaction which may actually support the case for an increase on the said tenant’s property. It is important therefore for tenants to take a much more proactive approach which will make them better placed to mitigate any increase in market values.

One option well worth considering is a re-gear. Opting for a longer term in return for a softer review or an incentive, either in terms of rent free, or even further investment into the building, may be a more productive way forward. Most tenants can project their business position for at least the next 10 years, particularly large occupiers for whom a move involves significant upheaval and needs to be timed well in advance. For those who are able to commit to the building, there is scope for the landlord to settle for a more favourable review, as securing income flow improves their investment profile and value of their asset.

Well-advised landlords also have opportunities to cement their position by locking in longer-term income and securing yields that cannot easily be matched elsewhere in the money markets. Longer term tenancies to strong tenants raise investment value which may, if ever required, be realised in the general market.

If you are a landlord or a tenant, and wish to discuss property leasing concerns, please do not hesitate to contact me for honest and practical advice on the best approach to take.