MSCI

UK lease events review

Q4 2016

Prepared by MSCI in association with Strutt & Parker

lease-events-review
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It seems incredible that we first started discussingthe dramatic shifts in leasing activity almost twodecades ago. Now in its 18th year, the analysisremains as important as ever.

Following a stellar year in 2015, the UK commercialcapital markets slowed in the first half of 2016.A combination of peaking capital values andEU Referendum uncertainty applied the brakes.Following 23rd June, with the ballot papers countedand the UK voting to leave the EU, we entered aphase of volatility. The immediate aftermath, withclosed redemptions and high drama speculation, hashowever quietened, and a semblance of normalisationhas returned.

Trading has been impacted, and as at Q3 £35bn ofcapital had been deployed into the UK markets, 34%lower than the same period in 2015. At the current time,this puts 2016 on track to match the levels of 2013.

With the capital growth phase of the cycle coming to aclose across almost all segments at the end of 2015,the fundamentals of property – certainty of incomeand rental growth – have again come to the forefrontof investors’ minds. The deceleration of the marketsin Q1 confirmed that notion and the decision thatemerged on 24th June cemented it.

This report provides the industry-leading view onhow income is changing and as such is a must-readfor those involved in real estate across all UK sectorsand geographies. It establishes the influence of leaseexpiries, break clauses and the evolution of rents andincentives upon lease renewal.

Investors may take comfort from leases againlengthening this year, having now increased toseven years, a full year longer than they were atthe bottom of the cycle. Incentives also moved out,however, and are now 9.2 months on average, up3% from 2015. It is also likely, given the currentvolatility, that landlords will be keen to attract andretain tenants through further incentivisation andflexibility on lease length.

As we move through the final quarter of 2016,our thoughts turn to the future. Every element ofUK commercial property leasing is linked to theeconomic and political landscape, and we are likely tohave many months and perhaps years of opacity untilthe terms of Brexit and subsequent trade agreementsare clear. The likelihood is that in the short term themarket will be two-tiered, with significant capitalseeking safety through prime stock and locations,and speculative buyers assessing the potential forprice softening in non-core markets. Occupationally,tenants are likely to continue to seek further leaseflexibility to allow for short term planning.

I would like to thank MSCI for continuing to producethe excellent analysis on both new and existinglease activity, which is fundamental in underpinningproperty as a mainstream asset class.

To download the full report, please click here.