Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?
Shaun A. Bond
University of Cincinnati
affiliation not provided to SSRN
Patrick M. McAllister
University of Reading - Department of Real Estate and Planning
Journal of Real Estate Finance and Economics, Vol. 36, No. 4, 2008
Seminal work by Grenadier (1995) derived a set of hypotheses about the pricing of different lease lengths in different market conditions. Whilst there is a compelling theoretical case for and a strong intuitive expectation of differential pricing of different lease maturities, to date the empirical evidence is inconclusive. Drawing upon a substantial database of commercial lettings in central London (West End and City of London) over the last decade, we investigate the relationship between rent and lease maturity. In particular, we test whether building quality, credit risk and micro-location variables omitted in previous studies provide empirical results that are more consistent with the theoretical and intuitive a priori expectations. It is found that initial leases rates are upward sloping with the lease term and that this relationship is constant over time.
Keywords: term structure of leases, office rents, London
JEL Classification: R33, C20Accepted Paper Series
Date posted: January 30, 2008
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