The landscape of London’s commercial landlords is changing and, while domestic owners still reign supreme (a recent report by property trade publication EG stated 61 per cent of all stock in central London in 2017 is owned by UK landlords), the current global demand for London can not be ignored.
Interest in London exists worldwide, however Asian investors have dominated UK headlines this year with deals such as CC Land Holdings Ltd’s acquiring The Leadenhall Building and Hong Kong’s Infinitus Group buying 20 Fenchurch Street, the UK’s largest ever single asset office deal.
These new London landlords need to be aware of the variance between aspects of the London property market and their domestic markets in order to safeguard themselves against possible pitfalls that can be avoided with the correct advice.
Chiefly, there is a significant difference between the lease structure of commercial buildings in Asia and the UK. In London a typical lease length will be 10 years, compared with approximately three years in Hong Kong. Landlords in Asia are therefore used to a constant churn of occupiers, allowing flexibility and requiring speed in negotiations which creates a relatively volatile rental market cycle that can go up or down every three years with no need for rent reviews.
By contrast, the UK’s leasing market traditionally moves slower (because it can) with occupiers often planning years ahead of lease expiries. What’s more, owing to the short leases available in Asia, there is a continuous dialogue that exists between landlord and tenant and consistent engagement leading to a very direct and hands-on approach. In many cases the landlord will manage the building themselves, as opposed to outsourcing services which is common practice in the UK.
The upward-only rent review that exists in the UK can be a novelty for Asian investors, as too can the idea of occupiers sub-letting their space when they find they no longer need all of what they have signed up to on a long lease. Meanwhile, the sometimes lengthy rent-free periods in UK lease renewals can catch out some of the less experienced investors who may not like, or have planned for, such a long break in income or properly considered the impact of net effective rents versus headline in their original analysis.
A further key difference between the two markets is the sheer volume of tower investments that exist in Asia when compared with the UK. Asian landlords are therefore familiar with managing new tower developments which is why we see these investors targeting London’s newest, best quality tall buildings. If an older building changes hands, there is less known about how to deal with obsolete space or space that is soon to come to the end of its long lease in need of refurbishment.
Finally, while there is a real drive in both markets to maximise the performance of a property, in Asia holding periods can be longer, with owners concentrating on the day-to-day offer for their building’s occupiers. In the UK, while rental and leasing performance is important, it is primarily because it is geared towards a targeted future investment transaction.