On the surface, the research tells a negative story: properties with (relatively) shorter remaining lease lengths (accounting for break clauses), have underperformed across this most recent real estate cycle (2008-2016) – see chart below.
In a ‘perfect’ investment market, this should, of course, not occur. The ‘market’ should demand an upfront yield that accounts for the risks posed by a shorter lease length. Thus data suggests that the ‘market’ has fundamentally mispriced (not accounted correctly) for risk on shorter-let properties; hence the underperformance.
The immediate takeaways for investors would seem to be: keep buying long-let property, avoid leasing risks and associated void costs; take the view that higher yields on shorter-let property do not provide enough compensation for the issues that are likely to evolve over the life of the investment.
Play it safe.
However, this is far too simplistic.
In a first blog, Tom Grounds shares his detailed analysis on the above hypothesis: Short leases and investment performance.
The final conclusions are written out in the 3rd edition of the Property Futures whitepaper: