Corporate real estate and commercial property leases in the UK are fundamentally built upon upward only rent reviews. Rent reviews happen in the 5th year of a lease, with the lease commencement date being the start of each cycle.
Due to their upward only nature, if market values have risen at the time of your rent review, so will your rent.
If rental values have dropped or stagnated between the last review (or lease start date) and the present one, then unfortunately, your rent will not go down. Instead, the best case scenario is that it will not rise any higher than your current passing rent.
As you may now be realising, this does not provide much benefit to tenants, particularly given the like-for-like trajectory of corporate real estate in line with how the wider economy is performing. What we mean by this, is that if real estate rents are, or should be cheaper and lower at the time of your review than the existing lease actually permits, then the likelihood is that the economy is experiencing challenges. However, corporate tenants will not see a reduction in their existing occupational costs.
If, as an occupier, if your firm has experienced a rent review this year, or you have one looming at any point from now up until the end of 2018, or early 2019, then you would have agreed your current headline rent at some point during the years 2010-2013. This could have been either the start of your current lease, or alternatively the date of your last rent review. Either way, it would have been based on a valuation at a time when the market was distressed and rents reflected this, by being considerably lower than we are experiencing currently. In essence, it was a fabulous time to have been negotiating rents as a tenant; which as advisor’s to occupiers, we classed as good times.
It is a well known fact that rock bottom for corporate real estate rents in the UK was between 2009 and 2012. Rents recovered only gingerly in the most prime Central London sub-markets towards the latter end of 2012, remaining conservative in their pick-up throughout much of the first half of 2013. However, since Q3 2013 rents have risen sharply as tenant demand has grown alongside the improving financial markets to the point we see today. That point is very much a supply- led inflation in office rents, with record-high rents being achieved in all of the sub-markets throughout Central London and beyond.
The St James’s market has hit £185 per Sq. Ft,
The City; £92.50 per Sq. Ft,
Kings Cross; £72.50 per Sq. Ft,
Shoreditch; £62.50 per Sq. Ft,
and Southwark/Bermondsey an incredible £90 per Sq. Ft.
In summary, corporate tenants throughout the UK with rent reviews this year and right up until 2019 are enormously at risk of potentially crippling increases to their passing rent. DeVono Cresa take a position alongside our occupier clients and act in defence of the upward only review, seeking to limit any increases to the minimal possible values and levels.