In the current climate for UK commercial real estate investment — characterised by higher debt-costs, yield volatility and weaker occupier demand in some sectors — the value levers have shifted.

While (speculative) development remains part of the toolkit for some, for mid-market investors with a long-term horizon we believe that lease engineering (i.e., the strategic design, structuring, re-negotiation and optimisation of leases) is increasingly the new form of “development”.

This, we feel, is where astute asset management can deliver return upside, lower risk and materially improve portfolio resilience. In this piece we explain what we mean by lease engineering, why the case for it is strong, how it works in practice and what the key execution disciplines are.

What do we mean by “lease engineering”?

At its core, lease engineering is the active and strategic treatment of a property’s lease structure (new leases, lease renewals, rent reviews, re-gearings, incentive structuring, tenant mix, break options, indexation, etc.) to improve the asset’s income profile, lease term, tenant quality and ultimately its valuation. In other words: rather than relying purely on building a new asset or radically re-positioning it, the investor focuses on creating lease improvement alpha by exercising control and proactivity over lease events. This is focussed on the belief that investing in property is not just investing in physical bricks and mortar – but, largely investing in the tenant relationship existing within it.

Advisory firms such as Cushman & Wakefield emphasise that their “Lease Advisory team adds value … by identifying and negotiating optimum terms … including lease restructuring, rent reviews, lease renewals”¹ within commercial property portfolios. Cushman & Wakefield, in essence state that the lease becomes the asset, not just the building. This is very much the house view at Manston.

For example: extending a lease term from five to ten years, adding a credible inflation-linked rent escalation clause, securing a stronger covenant tenant, or shifting a tenant’s break option by several years — any of these can materially reduce risk, and thereby increase value (via a tighter cap-rate). In our view, lease engineering is therefore a vital value-add strategy within the mid-market segment. Going deeper than this – we see lease re-engineering (or re-gearing) as not just a tool to provide one-sided, zero-sum value to the investor – but also to provide more flexible and nuanced terms to the tenant – what works for us both?

This quid pro quo is vital to consider – what can the landlord provide of value to the tenant? Are there changes that are mutually beneficial, or will there need to be an economic trade-off?

Why lease engineering is gaining strategic importance

Cost and risk of new development are elevated. With construction costs, ESG compliance costs and borrowing rates all elevated, the risk-reward for speculative new build is more challenging. Full-scale redevelopment often demands higher risk tolerance, a different skill-set and potentially significant costs. Construction price indices remain materially above 2019 levels through mid-2025 and are forecast to rise still further in coming years.² Lease engineering offers a lower-cost, lower-execution-risk alternative — often by working within an existing asset’s lease structure.

1. Yield and income focus in the current cycle. In an environment where borrowing costs are higher and liquidity is tighter, investors increasingly emphasise income stability and duration of tenant covenants rather than short-term capital appreciation. By stretching lease term, increasing lease revenue certainty (for example via fixed or index-linked escalations rather than a more traditional Open Market Review or “OMR”), an asset becomes more “bond-like”, which allows investors to bid a tighter yield or hold with greater confidence. Morgan Stanley Real Estate Investing observed in its mid-2025 outlook that resilient income will be the differentiator across strategies in the next phase.³
2. Greater dispersion of lease outcomes = alpha potential. In the mid-market, there is often lease heterogeneity: leases of varying lengths, tenants of differing quality, incentive structures scattered, indexation absent or poorly drafted (poor drafting of indexation clauses is a more common issue than one might hope!). That heterogeneity means there is more “hidden” value which a diligent investor can unlock — as opposed to the prime market where lease terms are more similar and pricing more efficient. Oddly — whilst we see this heterogeneity, we also see systemic homogeneity in lease structures — with identikit terms utilised as the status quo, rather than any real attempt to design a lease that suits the tenant’s specific needs and appetites alongside an investor’s need to generate a secure return. Thinking creatively is something that can add huge value here. As UBS Asset Management noted in April 2025, asset selection and management skill are now the key differentiators in UK CRE performance.⁴
3. Structural change in occupier behaviour. Occupiers continue to demand flexibility (break options, shorter initial terms, green clauses) yet also want control and modern specification. The tension creates opportunity: landlords who can craft leases that meet occupier requirements (flexibility) yet lock in duration and indexation (landlord priorities) create value. Lease engineering is precisely about aligning those interests.
4. Regulatory and ESG pressures raise the bar for older assets. For older assets with shorter leases or tenants unwilling to accept full repairing obligations or sustainability upgrades, the risk is that the asset becomes unlettable at economically viable terms (or even at all) or “stranded” — shrinking in value. By proactively engineering the lease (preferring tenants willing to invest, stipulating upgrade obligations, indexing rents) landlords can future-proof income and thereby reduce structural obsolescence risk. Lease engineering allows this: inserting “green clauses”, cost-sharing mechanisms and clear CAPEX responsibilities ensures both compliance and income protection.⁵ ⁷

What lease engineering looks like in practice

Let’s break down the typical mechanics and levers of lease engineering in a mid-market UK context:

a) Lease length and covenant strength: Extending lease term or negotiating a new lease with a high-quality tenant reduces re-letting risk, lets the investor underwrite income with greater confidence and often supports a lower cap rate. A five-year lease is generally riskier than a ten- or fifteen-year lease (even more so if breaks are removed).

b) Escalation and indexation: Where standard leases may have fixed rent reviews every five years or market rent reviews only, an engineered lease might include annual CPI or RPI-linked increases. That inflation linkage is increasingly valuable in a higher-inflation environment — and simultaneously allows for better financial planning by both tenant and landlord. Introducing annual CPI-linked rent increases (typically collared at, say, 1–4% to provide an element of certainty & security) turns nominal rents into real-term growth.⁶

c) Tenant incentives and fit-out contributions: Instead of giving the tenant lengthy rent-free periods or heavy fit-out contributions, lease engineering targets a better balance: shorter incentive periods, clearer tenant fit-out contributions, and claw-back mechanisms such as break-fees if the tenant departs early. This reduces cost and preserves value by better targeting the “important” subjective requirements of the landlord-tenant relationship.

d) Break clauses and landlord protections: Removing or extending tenant break options, or adding triggers for rent reviews/lease renewal back to market are methods of shifting risk backwards & forwards as part of the overall mélange of options. Additionally, engineering lease covenants to ensure tenant obligations (repairs, upgrades, ESG) and landlord ability to step in or re-gear is important.

e) Tenant mix and estate optimisation: In multi-let or mixed-use assets, lease engineering may involve re-positioning the tenant mix, consolidating smaller leases, or aligning lease expiry profiles to create a “mosaic” of lease events rather than lumpy exposures or rental-income cliff edges. This spreads risk and enhances portfolio predictability and thence value. This emphasises that the re-engineering need not be single-asset specific — but carefully incorporated across the network of assets within a portfolio to provide even better security of performance.

f) Reversion capture and vacancy management: Even when leases are shorter term or expiring, the asset manager can proactively work on early lease renewals, pre-lets or refurbishments timed to coincide with expiry, thereby engineering the reversion earlier and capturing rent uplift. This is an extension of lease engineering into value-add territory.

g) ESG obligations — incorporating sustainability clauses that align refurbishment, energy use, “green” CAPEX and reporting requirements between landlord and tenant.⁷ ⁹

Why we at Manston think this is “the new development”

At Manston, our investment philosophy has long centred on buying the right asset, at the right structure, with the right optionality – or, failing that, the ability to make those elements right in a cost-effective manner. In today’s market, that structure increasingly derives from the lease rather than the building alone. We believe that:

• The uptick in lease-engineering opportunities offers alpha within markets where yield compression is limited. In a cycle where broad cap-rate narrowing is unlikely (or selective at best), value creation by improving lease cashflows and duration is one of the few ways to outperform.
• The risk profile is preferable: lease engineering usually means working within existing leasing events, doing elemental negotiation, rather than risking full-scale construction/void exposure and starting from ‘square 1’. That fits our appetite to reduce risk.

CBRE Research highlight that in periods of flat capital growth, “income enhancement through active management is the dominant driver of total returns.”⁸ In effect, lease engineering provides that enhancement without new bricks and mortar.

Execution checklist: what to underwrite and deliver

To succeed in lease engineering, the following disciplines are critical:

1. Rigorous lease audit and event map. The first step is to map every lease in the asset or portfolio: expiry dates, breaks, rent review dates, incentive periods, tenant covenant strength, indexation, repair obligations, landlord liabilities. Without a clear picture of the “lease terrain”, you cannot identify where value can be unlocked and suitably layered across an entire portfolio or property.
2. Scenario modelling: yield sensitivity to lease improvement. Before negotiating, model the impact of different lease outcomes: e.g., tenant renews on same terms, tenant renews with 3 % annual uplift, tenant breaks and is replaced at higher/lower rent, breaks and void periods. Linking these to valuation sensitivity (via cap-rate tightening or income uplift) is essential. Scenario modelling of possible acquisitions takes up an exceedingly large amount of our MD’s time, but is time very well spent!
3. Tenant relationship and negotiation strategy. Lease engineering is often relational. Identifying tenants who are credible, prepared to commit, may undertake ESG or upgrade works, or are aligned with your communications is key. Sometimes offering such tenants flexibility (e.g., shorter initial term) in exchange for stronger landlord protections is a worthwhile trade. Another benefit of operating in the mid-market is that it is possible to generate good, long-term relationships with key decision makers at our tenants.
4. Investment in CAPEX/upgrade where needed. If lease engineering requires asset improvement (for example, to attract a covenant tenant or secure longer lease term), ensure CAPEX costs are clear, covenant is aligned, timing is manageable and the return on that lease improvement is discernible. For example, investing £150k to reconfigure HVAC and achieve EPC B can justify a 10-year CPI-linked lease with an institutional covenant — potentially delivering a significant ROCE on that expenditure through yield compression alone.⁹
5. Hedging lease expiry concentration. Even the best engineered asset will have lease expiry events. A critical discipline is to avoid “cliff risk” (many leases expiring together), and ideally create rolling expiry profiles across an investment portfolio. It is easier to engineer value when multiple leases mature in different years rather than all at once – your FD and your stress levels will thank you!
6. Clear exit strategy. Engineered leases add value, but only if the asset can be monetised appropriately: a future buyer must value your lease improvements. Make sure the lease is structurally sound and market-recognised (e.g., annual CPI escalation, bankable covenant) so that the exit bid aim is credible.

Realistic expectations and limitations

While the case for lease engineering is strong, it is important to have realistic expectations and acknowledge limitations:

• Cap-rate compression is not guaranteed. Engineering leases improves cashflows/duration but unless the market rewards with a tighter yield, the value uplift may be less than expected. In this cycle, yield tightening broadly is challenging.
• Tenant risk remains. Even well-negotiated leases carry risk of tenant default, especially in sectors under pressure. A longer lease term does not fully eliminate this and careful thought must be given to potential credit risks, particularly when there is systemic economic stress.
• Refurbishment cost risk. If the lease engineering depends on major capex (ESG retrofit, asset re-modelling) the outcome may not materialise or costs may overrun, reducing net uplift. Consider ways of fixing, hedging or making expense contingent.
• Market visibility. Some engineered lease benefits (e.g., increased duration, better covenant) may be “baked in” only if the market perceives them. They are not realised value until exit or refinancing.

Illustrative example: how a lease engineering play might look

Consider a mid-market multi-let office estate acquired by an Investor. On purchase the following profile is noted: average remaining lease term 4.2 years, annual rent £1.2m, no indexation, a mix of tenant covenants, and a cluster of leases expiring in year three. A possible action plan:

1. Audit lease schedule and identify three medium covenant strength tenant leases expiring in year 3 with no break but little current incentive to extend.
2. Approach tenants early: negotiate one lease to extend to year 8 in exchange for a modest landlord-funded fit-out; negotiate another to let us redevelop the floor at cost to the tenant but with a new lease at improved rent (where recent inflation has taken passing rents above the market into ‘over-rent’ territory) + CPI escalation to provide mutual certainty. Possibly consider providing a tenant break clause, but with a cost attached for execution.
3. Replace the third tenant with a new covenant tenant on a fresh 5-year lease, CPI-linked annual increases, minimal rent-free.
4. Perform light capex upgrade to common areas to create better occupier environment (budget £100k) to support the new rent level.
5. With lease duration increased, indexation added and covenant improved, we feel more confident to hold or exit well — modelling shows that if the valuation cap-rate tightens by only 25 bps the value uplift from lease engineering + improved cashflow generates IRR ahead of the broader market.

This kind of play illustrates how lease engineering functions like “micro-development”: you may not be resurfacing the entire building, but by reshaping the lease structure you deliver a better income stream, lower risk, and better exit optionality.

Why this is particularly relevant for mid-market UK commercial real estate

In the current UK context, and especially in the mid-market segment (sub-£15 m assets, regional offices, industrial estates, multi-let assets), lease engineering presents multiple tailwinds:

• Smaller-ticket assets often have lease structures that are less optimised (less scrutiny from big funds bringing institutional efficiencies) → room for improvement.
• Widely dispersed sub-markets mean more fragmentation, more mis-pricing of lease risk/duration.
• In sectors/cities where ESG retrofit costs are rising, landlords who can secure committed tenants (via leases) are better positioned to justify CAPEX.
• In a higher-rate environment, investors pay a premium for income certainty and duration — engineered leases offer that.

Consequently, for a mid-market house like Manston, a focus on lease engineering aligns perfectly with our risk-return appetite, our ability to engage actively in asset management, and our commitment to long-term hold.

Conclusion: lease engineering as a core value-creation lever

To navigate the next cycle effectively, real estate investors must adapt. Speculative build-to-let and broad yield-compression plays are no longer the reliable saviours they once were. Instead, value will increasingly come from structural improvements in income and risk profile, delivered via lease engineering. In effect, the lease is the new “development envelope”.

At Manston we remain conviction-led: we look for assets where lease structure matters (or can be made to matter), where the lease events present re-engineering opportunities, and where the asset manager can play an active role in stretching term, improving covenant, capturing indexation and layering optionality. This is not about chasing yield blindly; it is about building disciplined, sustainable return pathways rooted in the lease.

From our vantage point: investors who recognise that lease engineering is the new development, and deploy capital accordingly, will be at a competitive advantage in these markets. They will win not because the market moves rapidly in their favour but because they improve the foundations of value at an asset level, make risk visible and hold for the longer game. In short: in a world of higher costs, uncertain macro and tighter debt markets, lease engineering is a game changer for the mid-market investor.

Footnotes

1. Cushman & Wakefield — UK Lease Advisory service page. Cushman & Wakefield
2. UK ONS Construction Output Price Indices (OPIs) — dataset (Jan 2014–Jun 2025). Office for National Statistics
3. MSREI — CRE Bright Spot within Murky Macro Backdrop (Mid-Year 2025 Outlook, July 2025 PDF). Morgan Stanley
4. UBS Asset Management — UK commercial real estate yields (Apr 17 2025).
5. DESNZ / GOV.UK — Non-domestic private rented property: Minimum Energy Efficiency Standards — landlord guidance. GOV.UK
6. CBRE — Open market vs index-linked: which offers a better deal in UK logistics rent reviews? (discusses index-linked mechanisms and reviews). cbre.co.uk
7. Better Buildings Partnership — Green Lease Toolkit (Updated Jan 29 2024). betterbuildingspartnership.co.uk
8. CBRE — UK Real Estate Market Outlook Mid-Year Review 2025 (Aug 5 2025). cbre.co.uk
9. UKGBC — Building the case for net zero: Retrofitting Office Buildings (Jan 2024) / Commercial Retrofit guidance hub (Jan 2024). UKGBC