IT IS hard to believe that, even in this current troubled market, rent reviews are carried out on an upwards-only basis but there is growing pressure to end this, particularly in the retail sector.
There us already a clear swing towards monthly rents payable in advance instead of quarterly but changing the upwards-only system can be tricky.
Upwards-only, for a start, can mean static and not downwards, and there are good arguments for upwar
ds-only, a key one being that it means income security, underpinning the attraction of the property as a long-term investment.
Most agents will sit on the fence in the argument because one day they could be acting for a tenant and the next for a landlord.
Andrew Hill, Edinburgh-based director of professional advisory services with DTZ, believes that there is every likelihood that a move away from an upwards-only approach will become a forceful issue as tenants continue to seek further ways of minimising their occupational costs and outlay.
He goes on: "In response to mounting recessionary pressures on the retail sector, occupiers are increasingly seeking to manage cash flow. Thus far the focus has been on the adoption of monthly rental payments but, in response to the changed commercial environment, the upward-only provision might be the focus as the property market enters a period of flux."
DTZ research shows that upwards-only provides a guarantee to developers and investors, is not inflationary or the main cause of business failure, landlords are able to offer generous incentives and rents are rarely more than 15 per cent of a tenant's outgoings.
On the other hand, he says it could be suggested that occupiers shoulder too much of the risk of holding property. Upwards-only gives landlords unparalleled income protection which is not an incentive for good estate management and, the research says, the system is maintained by powerful interests, institutions and property companies, supported by professionals with vested interests in high rents.
Kenneth Gerber, commercial real estate partner with lawyers Anderson Strathern, says it is difficult to see how the property industry or lenders' institutions would find a ban on upwards-only reviews at all palatable.
Prime retail would probably not be significantly affected, as rents tend to increase in that sector anyway. The office sector would be affected adversely in respect of property that is not new stock or in prime locations, and it could become difficult to obtain funding to buy non-prime stock.
Industrial properties tend more and more to have short-term leases with no rent review, and therefore these would not be significantly affected.
Certainty of rent income at no less than the level current at the time of loan had been a big driving force in allowing lenders to fund commercial property, at what has historically been advantageous terms. If there is the prospect of rents going down, commercial property investments would become the pariah of the lending industry.
A significant amount of UK commercial property is owned by UK pension institutions and by investors from outside the UK; the attractions of UK commercial property is the landlord-friendly regime in commercial leases and the upward-only rent reviews.
Gerber continues: "If upward-only rent reviews were abolished, there would be a flight to quality, with purchasers investing only in good properties where rents are likely to increase or remain stable, and therefore older retail, office and industrial stock would become far less marketable. This would lead to decay and vandalism in town centres and to the disappearance of suburban shops."
First tenant for Glasgow's £70m G1THE massive £70 million Glasgow re-development G1 – the former GPO HQ in George Square – has secured its first tenant at a new headline rental for the city. The construction and international property consultancy Gardiner & Theobold has signed a deal for the 12,314sq ft first floor of the HF Developments flagship development and will move into the building – which will have a total of 130,997sq ft of office accommodation – when completed later this year. Lambert Smith Hampton are the agents.
THE Brathens Business Park, a development on a former research centre in Banchory, has signed up its first tenant – Natural Research Projects, an environmental consultancy specialising in birds, which has taken a ground floor wing at £18,000 a year. Knight Frank acted for the landlord, Seafield Properties.
DRIVERS Jonas has completed a pre-sale of 14,000sq ft of warehouse accommodation being constructed at the Blochairn Industrial Estate, Siemens Place, Glasgow. Acting for Stourbridge Properties, it secured the pre-sale to FPS Distribution who will relocate from its Glasgow premises in the summer once the £1.2m development is completed.
HIGHCROSS, advised by Savills, has acquired Wallace House, a multi-let office investment at Maxwell Place, Stirling, from Tannson for £2.06m, a net initial yield of 11.12 per cent. Graham & Sibbald acted for Tannson's receiver, Ernst & Young.
INFRASTRUCTURE Management has taken4,909 sq ft at 11 Thistle Street, Edinburgh, at £19 a sq ft. The company, which provides vehicle management services, has struck a ten-year deal. The landlord, Zurich Assurance, was represented by Jones Lang LaSalle and DTZ.
ACTING for landlord Knowe, Properties Ryden has secured the Royal Norwegian Consulate General as a tenant at 12 Rutland Square, Edinburgh. The Consulate, self-represented in the deal, is relocating from George Street and has taken a ten-year lease on the 1,586sq ft ground floor accommodation at a rent of £23,000 a year.
ON BEHALF of the Bruce Colquhoun Partnership (the landlords), Allison Lightbody Waddell has let first-floor offices at 41 St Vincent Place, Glasgow, to Giant Risk Solutions on a ten-year lease. The annual rent of £32,500 equates to a rate of £17.10 a sq ft.
• Send deals details to jimdow@lumison.co.uk
