This report tracks the major lease events that determine the income stream from commercial real estate in the UK.

Aim of the research

In the past, property investors have had to rely on anecdotal evidence and "rules of thumb" to produce cash flow projections for commercial real estate asset appraisals and valuations. This report provides empirical evidence on the key determinants of the income stream from commercial real estate. The results give investors, valuers, researchers and lenders a valuable insight into leasing and a concrete foundation on which to build cash flow models and to devise investment & leasing strategy. We would welcome comments on how the research might be extended in the future.

This report tracks the major lease events that determine the income stream from commercial real estate in the UK.

Section 2 of the report covers what has happened following a lease expiry: i.e. what proportion of tenants renewed their lease? What proportion of units were let to a new tenant? What proportion of units became vacant at lease expiry? How long on average is a unit vacant for? This section also looks at the preceding lease length versus the new lease length on leases that were renewed or re-let.

Section 3 looks at what happens to the rent on a new lease compared to the previous lease and how this varies according to whether the tenant renewed their lease or if the unit was re-let in the open market.

Section 4 identifies the results of break clauses: i.e. what proportion of tenants exercised their break? If a break clause was exercised what proportion of units became vacant or relet?

Section 5 then covers the proportion of leases where the tenant has entered into liquidation or receivership. Finally, Section 6 looks at average vacancy rates.

Methodology and sources of data

The research draws on IPD's unique databank, which comprises of an estimated 55% of all professionally managed property investment in the UK. The analysis period covers thirteen years from the beginning of 1998 up to the end of 2010. The analysis is broken down into use type i.e. Retail, Offices and Industrials and also by market segments (see Glossary on page 28).

The key to the analysis has been to concentrate on those properties held as standing investments and to compare the valuation tenant records at the end of the preceding quarter with the valuation tenant records at the end of the quarter. Changes in the tenant records between the two valuation dates have been allocated to a particular event; lease expiry, break clause exercised or default.

The analysis includes at least 150 leases in each quarter but over 500 leases in some quarters. Some tenants have been omitted if funds have made wholesale changes to their tenant reference numbers, so that one year's records cannot readily be linked to the previous year's records. The analysis also excludes non-standard leases such as car parks, sub-stations, mobile phone masts, advertising hoardings, owner-occupied units with notional leases, other de minimis interests, which although numerous, account for only a small fraction of the total income stream.

Read the full Lease Events Review 2011.