July 25, 2013 8:18 pm

Surplus commercialproperty leases worth up to£75bnBy Ed Hammond, Property Correspondent

British businesses are sitting on surplus property leases worth as much as £75bn, accordingto a new study that underscores the depth of inefficiency in the way companies managetheir real estate portfolios.

The figure suggests about 20 per cent of all property leased by the private sector, which hasa total rental commitment of £382bn, is not in use or has been sublet to pare losses.

The glut of space, which reflects the downsizing many businesses during the financial crisis,also suggests many buildings will fall vacant within the next few years.

Property rents are a significant cost for most companies and for some sectors of theeconomy, such as retail, the largest single overhead. However, rental agreements areusually made on long-term deals, meaning a fall in space requirement can leave businessespaying millions of pounds for unused property.

“It is a real problem for a lot of companies but not one that many do much about,” saidHoward Cooke, director at Core Consult, the property consultancy which co-authored thereport.

“Finding other tenants to take on the leases is tough and the rent you receive is usually along way below the rent you are paying out for the original lease”.

In a bid to cut their losses, some UK companies have started using specialist lease buyinggroups, which take on the surplus leases and negotiate with landlords to exit the contractfor a fee. Companies including supermarkets Morrison and The Co-op and support servicesgroup Initial Rentokil have all sold off leasehold liabilities.

The emergence of these specialist lease buyers highlights the extent of the problem surplusproperty can cause for some businesses but also suggests a change in attitude to dealingwith the problem.

“Operational real estate can be a huge overhead for any business but it is usuallyunavoidable,” said Nicholas Cheffings, real estate partner at lawyers Hogan Lovells.“Paying for expensive space you no longer need rarely makes sense but the problem in the

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past has always been finding someone to take on the liability”.

The UK commercial property market is almost unique globally for the way leases arestructured to favour landlords over tenants. Under English property law, most commercialleases are known as “triple net”, meaning the tenant is responsible for rent, buildinginsurance and maintenance.

The structure has made the country’s best performing property markets, such as the City ofLondon, highly sought after by international investors. The attraction was underlined lastweek by research revealing that overseas investors were behind a record 82 per cent ofproperty transactions in the City during the six months to July.

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