Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?

Abstract

Term structure of leases, Office rents, London, R33, C20,

Commercial leases, terms and options in the light of game theory

“…A study by Mooradian & Yang (2000) on 311 US leases suggests that tenants are ready to pay a substantial premium for a downsizing provision, while subletting or cancellation options have no significant effect on rents. Bond et al (2008) test for the influence that the length of the lease break option has on rents and, contrary to expectations, find that the relationship is statistically significant, but negative. The explanation they provide is that the farther the option is from expiration, the lower its value.…”

“…His study on Greensboro, NC, yields a significant and negative relationship. A similar conclusion is arrived at by Bond et al (2008) for the London office market while Desyllas (2000) finds a negative, but statistically insignificant coefficient for Berlin. In their study on U.S. metropolitan areas, Wheaton & Torto (1995) obtain significant, both positive and negative, relationships between size of rental area and office rent.…”

“…On the contrary, and in line with Bond et al (2008), building class, a proxy for the overall quality and functionality of the building, emerges as a most powerful office rent determinant in both submarkets. In Chicago, Class B and C buildings command a rent discount of 9.6% and 18.5%, respectively, compared with Class A ones.…”

“…Issues addressed include building quality and/or prestige Glascock et al (1990);Mills (1992); Wheaton & Torto (1995); Dunse & Jones (1998); Gat (1998); Archer & Smith (2003); Desyllas (2000); Slade (2000); Dunse et al (2002); Gunnelin & Söderberg (2003); Bond et al (2008);Nitsch (2006), internal services and amenities (Mills, 1992;Slade, 2000;Nitsch, 2006) as well as layout and functionality of the rented premises (Dunse et al, 2002).…”

Is there a term structure in land lease rates?

“…Moreover, they identify different shapes for the term structure during a boom-and-bust cycle of the property market. Bond et al (2008) find an upward-sloping term structure curve for office rents in London, but this shape does not vary over time. In contrast, Fang and Ruichang (2009) report a downward term structure for the office rental market in Shanghai.…”