Blog: Rising market could trigger upsurge in commercial rent reviews

By Andrew Hill, Partner, Knight Frank, Edinburgh

Rents are a particularly hot topic in the residential sector. Since the economic crisis, they have seemed to be on an inexorable rise, with “generation rent” a now-popularised term. On the other hand, in the commercial world they’ve been much less interesting – in fact, for many years after 2008 they remained more or less static in Scotland.

However, as the economy has recovered, that situation has changed – particularly in the past three years or so. Rents have been steadily increasing, certainly in prime office and retail destinations such as Edinburgh and Glasgow city centres, along with well-located industrial warehousing.

If we take the capital as an example, Grade A office rents are now at, or around, £30 per sq. ft.; Zone A retail is in the region of £200 to £250 Zone A in prime locations, such as Princes Street and George Street - the highest-known deal hit £275 per sq. ft. this year; industrial warehouses are looking at £7.50 per sq. ft. and trade counters £10.00 per sq. ft. While all of these figures are well beyond where they were in the immediate aftermath of the crash, it’s fair to say the anticipated deluge of disputes over rents hasn’t yet manifested itself.

That could well cease to be the case soon, though. With rents increasing in many areas, driven by the number of new lets and the current dynamics within the Edinburgh and Glasgow markets, more landlords will be looking for uplifts on their properties. Typically, they’ll do this every five years, in accordance with their lease – so any businesses which made agreements during 2012, when market conditions were less than stable and rents appeared likely to remain the same, could be looking at an upwards review in the next 12 months.

The evidence landlords can call upon to support their case is likely to be compelling. In Edinburgh, most sectors are relatively buoyant and the market fundamentals are solid: there is an insatiable appetite for space, from office occupiers, leisure tenants, and for residential conversion. Last year’s take-up was particularly strong, with more than 1,000,000 sq. ft. let across the city. While 2016 won’t quite hit those heights, it’s on track to remain robust in the face of uncertain conditions.

At the same time, supply is very limited – both in Edinburgh and Glasgow. Lack of development land and a limited appetite for speculative development finance during the downturn has meant that supply is failing to keep up with the level of demand and, a cursory glance of basic economic theory suggests, rents can only increase.

Hence the likelihood of conflict. In many instances, tenants will have become used to no changes to their rent – they could be reluctant to accept the substantial increases that might be round the corner. For the landlords’ part, they’ll be looking at competing properties and considering what it means for their position. While a few years ago they may have passed up the opportunity to review rents, they’ll be unwilling to do so now.

Of course, not everyone will see an increase to rents as an inevitability and, when a tenant and landlord can’t agree on a rent, the case will go to a third-party surveyor – someone appointed by the Royal Institution of Chartered Surveyors (RICS) to act as either an independent expert or arbitrator, who can make a determination or judgement on the case.

While canny landlords won’t want to miss any upcoming lease events, tenants may need to consider settling the matter quickly. In a rising market, the longer it is left the greater the risk of a higher rent increase.

Whatever happens, if the last few weeks are anything to go by, we expect to see more rent reviews reaching third-party determination in the year ahead. All of the parties involved need to ensure they are fully aware of the associated risks and rewards by seeking professional advice – or it could be an expensive prospect for everyone.