Definition of commercial property market rent

The concept of market rent in commercial property markets is not straightforward.  It is defined in the Valuations Standards of the Royal Institution of Chartered Surveyors, commonly referred to as the Red Book, as

“The estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.”

“Whenever Market Rent is provided the ‘appropriate lease terms’ which it reflects should also be stated”

This definition is a global one and appears in the International Valuation Standards commonly known as the White Book (IVSC, GN 2, paragraph 3.1.9.1.)

It appears to be the amount that a property would let for in the market place at the date of leasing. 

But many rents are not what they seem as, since the property market crash in 1990, landlords have sought to keep the level of rents in the lease contract high.  They can do this by offering tenants lots of incentives at the beginning of the lease such as rent free periods, stepped rents, capital payments, help with fitting out and take-back of existing premises too name a few.  These incentives lead to higher rents being paid after the inducements to let have expired than would be the case if rents had been paid from day one of the lease.  The use of upwards only rent reviews helps support this higher level of rent into the future beyond the first rent review in the lease, typically after 5 years in UK leases. This is why the sentence on appropriate lease terms has been inserted.

The rent paid after all incentives such have expired is called the headline rent and the rent that would have been paid had no incentives been given is called the effective rent.

Example

Current levels of commercial property headline market rents can be found within research and marketing material from many of the major property consultants operating out of the UK such as Jones Lang LaSalle, CBRE, DTZ, Cushman and Wakefield and Savills. Current levels of incentives necessary to support these headline rents are more difficult to identify.  However, there is an annual lease structures review produced by the Investment Property Databank and the British Property Federation identifying the incidence of rent free periods and break clauses within leases amongst other clauses and IPD produce an annual Lease Events Review with Strutt and Parker which identifies whether tenants leave at the end of leases or at breaks and resulting empty periods. [1]

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