Reworking Lease Expires

FIGURE 2: MODELLING LEASE RENTS VERSUS MARKET RENTS OVER AVERAGE LEASE LENGTH

SYDNEY Lease term: 5 years (between market reviews)

Expiry: June 2023 Unit: AUD/sqm/yr

Rental escalation: 3.5% per annum

AN OCCUPIER COULD FIND THEMSELVES IN AN UNDER-RENTED SITUATION IF MARKET RENT GROWTH HAS BEEN STRONGER THAN ANY RENTAL ESCALATIONS INCLUDED IN A TENANT’S LEASE AGREEMENT. CONVERSELY, AN OCCUPIER COULD BE OVER-RENTED IF MARKET RENT GROWTH HAS BEEN WEAKER THAN ANY RENTAL ESCALATIONS. Two examples for Sydney and Ho Chi Minh City are provided in Figure 2, using standard market conventions for lease covenants. Here it is important to note that over the length of a lease term, these changes can not only vary year to year but that the differences between market rents and “lease rents” can be significant to the positive or negative by the end of the lease or at time of market review. The result being that a tenant may face a (significant) rental cost escalation or reduction upon their lease expiry.

Outcome: Over-rented

Lease rent 12% above market rent on expiry

Market Rent

Lease Rent

HO CHI MINH CITY Lease term: 4 years Rental escalation: None

Expiry: June 2023 Unit: VND/sqm/mo

Outcome: Under-rented Lease rent 5% below market rent on expiry

Market Rent

Lease Rent

Source: Cushman & Wakefield

CONTACT ME TO START REWORKING MY REAL ESTATE STRATEGY

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CUSHMAN & WAKEFIELD

REWORKING LEASE EXPIRIES