Commenting, Kelvin Davidson, property economist at Capital Economics, said: “With the economy in recession for much of 2009, the latest data from Strutt & Parker and IPD suggest that landlords fared reasonably well last year, retaining a high proportion of tenants and in many cases even raising rents at lease expiry.
“Given that the economic backdrop remains fragile, however, we doubt that investors will feel confident enough about the near-term security of income streams to lower risk premiums. Thus, our view is that property yields are now close to a floor.
“The S&P/IPD Lease Events Review mainly focuses on factors which affect the income streams accruing to landlords from existing leases, e.g. the use of break clauses, changes in void rates and duration, tenant defaults and so on.
“One positive result for landlords to come out of the latest review was that 38% of leases expiring in 2009 (weighted by rental value) were renewed by the existing tenant, slightly higher than 2008’s result (33%) and well above 2007’s figure of 17%.
“Moreover, almost 40% of those renewed leases involved a rental increase, with the bulk of increases being up to 20%.
“Given that the level of IPD market rents at end-2009 was only 3% higher than in 2003’s trough, and also bearing in mind the recessionary economic environment that prevailed for most of 2009, the scale of those rental uplifts on renewed leases may well have been
viewed by many landlords as a significant success.
“On the other hand, however, the latest review also contained plenty of less encouraging aspects for landlords. Perhaps most noteworthy was the surge in the propensity of tenants to exercise break clauses.
“After falling from 43% in 2007 to 24% in 2008, in 2009 the share of leases with a break clause that saw that right exercised rose back to 44%.
“As of end-2009, two-thirds of the property where lease break clauses had been exercised during the year remained empty.
“Looking ahead, the prospect of continued economic growth (albeit modest) over the next 12 to 18 months should support landlords’ income security which would, all else equal, lower property risk premiums.
“However, there is still scope for employment to fall further and in this environment we would be surprised to see the downward trend in property yields continue for much longer.”
