The return generated by central London offices increased to 0.6 per cent in March, rising from the 0.5 per cent recorded in February. Figures published by CB Richard Ellis (CBRE) revealed the sector is performing much better than UK commercial property as a whole, where returns of just 0.1 per cent were achieved last month. Meanwhile, capital appreciation for commercial real estate investments remained in negative territory at -0.4 per cent. The central London market was the only place in the country where capital values climbed in March, increasing by 0.2 per cent.
Nick Parker, senior analyst of economics and forecasting at CBRE, commented: "There is no doubt that a prevailing weak economic climate for the UK is hampering the commercial real estate sector, with values faltering as a result of investors being cautious over occupier market prospects." Research released by IPD recently highlighted the effect the length of a lease can have on the overall value of commercial property. According to the organisation's findings, premises where a five-year lease is in place, as opposed to a longer term, will see their average value decline by approximately 1.8 per cent. By contrast, a lease of 20 years or longer can see around five per cent added to the worth of an asset.
Client manager at IPD Andrew Gerrity explained landlords are increasingly offering shorter leases - with roughly 44 per cent of properties now on five-year contracts - in an attempt to avoid costly void periods. "While the impact of vacancies on values is higher, landlords need to be aware that signing shorter leases is not necessarily a guarantee of value protection, although it generates a higher yield initially, holding out for a tenant on a longer lease is more profitable in the long run," he asserted. Mr Gerrity added a rising number of investors are signing tenants on long-term contracts, with many offering reduced rates at the beginning of the lease period in order to make this type of deal more attractive.