Fresh news from the real world of rents

More evidence of this comes this week from the Investment Property Databank (IPD) of 102,000 commercial property tenancies, prepared for the would-be saviour of the high street, Mary Portas. The survey includes 10,236 new leases granted between January 2010 and March 2011, so it’s pretty up to date.

In the real world of commercial properties, tenants are pushing for ever better deals. The average lease length is 5.7 years, but tenants achieved a “significant increase” in break clauses with a third of leases now having one. And the average rent-free period is now 10 months as landlords look to attract tenants and give them a chance to establish their businesses. Most tellingly, rental growth since 1989 has lagged a long way behind inflation.

In real terms, says the IPD, standard shop rents have fallen by 37% over the period. However, because business rates increases are linked to RPI, shops have seen their rates bill rise by 94% since 1989.

Liz Pearce, chief executive of the British Property Federation, summed the trends up: “Landlords are increasingly flexible and retail property leases continue to adjust to economic conditions, with leases that are shorter, offering breaks and substantial rent-free periods to help new shops get off the ground.”

And there’s quite a lot of this flexibility in the tenanted pub world. But new leases with automatic RPI rent increases, more prevalent in the past two years, are a retrograde step for tenants.

It’s a direct contrast to the commercial property world where the equivalent, an upward-only rent review, has been phased out in the past two decades as landlords moved away from trying to impose the traditional 20-year “institutional” lease (with its upward clauses) that prevailed in the early 1990s.

Leases with automatic annual RPI rent increases are so rare that the British Property Federation doesn’t seem to record them. So the irony is that, as annual RPI rent increases and upward-only rent reviews have become less common in the real world of commercial property, they are becoming more common in the tenanted pub world. Talk to folk off the record outside the top tier of pubco management and you are very hard pressed to find anyone who thinks they can be justified.

A well-known family brewer who has scrapped RPI rent increases told me this week: “Profits for tenants don’t go up by RPI — I don’t think it’s a sensible way forward.”

One property expert, who negotiates commercial free-of-tie leases for licensed retail clients, describes the landlord’s dream of automatic RPI as a “peculiarity” of the tenanted world. He adds that if a landlord gets guaranteed RPI income growth in a lease then the tenant should be “reflecting that value by getting concessions elsewhere”.

This means that someone thinking of signing an RPI lease should look at how the rental commitment escalates and negotiate the countervailing benefit.