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Telecommunications Survey
2010
Telecommunications Survey
2010
Welcome
I’m pleased to introduce the2010 Strutt & ParkerTelecommunications Survey.We have surveyed over4,000 telecoms sites, to produce this reviewof the telecoms market, which comes at aninteresting time in the industry.
Operators are seeking to make substantialsavings in costs as the market for newcustomers has become saturated, but partsof the networks have insufficient capacity tocope with demand. The easiest point ofpressure to effect savings are the rents paidto individual landlords and property owners(particularly those unrepresented). Dealsbetween operators to share infrastructure(termed Radio Access Network (or RAN)sharing) have been announced andoperators are seeking substantial rentreductions with threats to decommissionsites.
These are tough times, but at Strutt & Parkerwe have considerable experience in thisspecialist market and are committed toworking with our clients to overcome thechallenges and capitalise on theopportunities in the months ahead.
Robert PaulHead of Strutt & Parker’s Telecoms Group
3 Greenfield Sites
4 Rooftop Rents
5 Site Sharing
6 RAN Sharing
Decommissioning
7 Contact Us
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Greenfield SitesAssertions made by operators that rents have plummeted are not borne out by our most recent survey ofover 4,000 site rentals. There are isolated cases of reductions but these have not yet emerged as the trend.
Even ignoring rentsreviewed in line withthe RPI, our survey ofgreenfield sites revealsthat rents over the pastnine years havecontinued to rise aheadof the RPI although thisis now levelling.
£6,000
£5,000
£4,000
£3,000
£2,000
£1,000
20012000 2002 2003 2004 2005 2006 2007 2008 2009
Masts up to 15 metres
Average rents for masts up to 15mSource: Strutt & Parker Telecoms Group Research
RPI movement
Ren
t per
ann
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At lease renewal, operators are refusing to accept established norms in the industry such as Open MarketValue (OMV)/Retail Prices Index (RPI) reviews and state that they will only agree OMV (presumably in the hopeof further controlling rental growth). Our Survey continues to show that a significant proportion of new leasesare still being agreed to OMV/RPI.
There is a continued trend in calls for third party determinations as a result of operators’ reluctance to acceptrental evidence supporting increases above inflation. We are aware of 53 cases since 2000 that have gone tothird party determination and our analysis of these indicates that the landlord has beaten the rent offered bythe tenant in 73% of these. Operators appear to be faring no better in statutory lease renewals with theCourts awarding rents based on market evidence not assertions of plummeting rental values.
Operators continue toassert that there is norelationship betweenheight and rent yetanalysis of the marketover the past five yearscontinues to suggestotherwise.
£6,000
£7,000
£8,000
£5,000
£4,000
£3,000
£2,000
£1,000
Average rents over a five year period for differing height mastsSource: Strutt & Parker Telecoms Group Research
Ren
t per
ann
um
Mast up to 15m 16 - 20 metres 21 - 30 metres > 30 metres
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Rents of standard 15minstallations across thewider regions suggestany historical variationis diminishing asScottish and Welshrents catch up withthose in England: -
£6,000
£7,000
£5,000
£4,000
£3,000
£2,000
£1,000
2004 2006 2008
England
Average rents for 15m masts over a five year periodSource: Strutt & Parker Telecoms Group Research
Scotland Wales
Ren
t per
ann
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Many taller masts have been agreed at base rents of £10,000 with further income from site sharing.
It is therefore significant in respect of the height argument that operators are reluctant to consider tall mastsas evidence in 15m rent reviews but are happy to use 15m rentals as evidence for taller sites!
Operators seek to contain comparable evidence used against them by only considering rental evidence in thelocality. There is however very little evidence that regional location is a major factor in determining rents ofgreenfield sites. The type of location that the site serves is significant. A motorway site in Wiltshire commandsmuch the same rent as a similar motorway site in Cumbria.
Rooftop rentsOver the past 10 years rooftop rents have risen steadily above the rate of inflation.
Rooftop rents in majorcities now average£12,000 per annum andfor the smaller towns£8,000:-
In central London rents now average in the order of £20,000 for installations with 6 or more antennae.Microcells are generally in the order of £3,000 to £3,500 each.
£12,000
£10,000
£8,000
£6,000
£4,000
£2,000
20012000 2002 2003 2004 2005 2006 2007 2008 2009
Rent
Rooftop rentalsSource: Strutt & Parker Telecoms Group Research
RPI movement
Ren
t per
ann
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Site sharingUnlike other sectors of the commercial property market it is normal in telecoms leases to restrict assignmentand to prohibit third party use.
Where third party use is permitted the landlord usually obtains an additional payment. This is often based ona percentage of the rent paid to the mast operator for the rights granted; such rents normally increaseannually in line with the RPI. These rents are based on an operator renting space for specified equipment onan existing structure and bear no relationship to the greenfield rental value of the site.
Analysis of site sharing on over 100 masts across the UK suggests concessionary rates operate betweentelecoms operators as against arms length transactions where a third party infrastructure provider hasprovided the mast as illustrated: -
Rights Typical inter-operator Third party mastsrate card
3 antennae and cabin £5,500 £8,500
6 antennae, 1 dish and cabin £6,750 £10,000+
The average site share rental is £7,250 per operator.
On most rooftop agreements site sharing is prohibited.
Our survey reveals that the majority of greenfield leases restrict the operator to use within the GroupCompany (36%). The majority of sites have a payaway of 30% or over (43%) in respect of any third party use.Only a small number (3%) of sites have an all inclusive rent (i.e. site sharing is valued within the base rent):-
In view of the reluctance of operators to provide transparency of site share income, despite the landlord beingreliant on this for a significant portion of his income, payaway based on a percentage is slowly being replacedby fixed sums per sharer. The average additional rent passing to the landlord in respect of such limitedtransactions is approximately £2,500 per sharer.
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The right for a tenant toshare the site with thirdparties is valuable
Third party occupancy provisionsSource: Strutt & Parker Telecoms Group Research
Payaway < 30%
%age %age
Payaway 30%
Payaway 31 - 50%
Payaway > 50%
Grp Co only
Permitted
Prohibited
Infrastructure SharingIn their quest to cut costs, operators have embarked on ambitious infrastructure sharing arrangements thatmay lead to a substantial reduction in the present 52,000 telecoms sites across the UK.
An infrastructure deal already in place between H3G and T-Mobile is anticipated to lead to thedecommissioning of 5,600 sites over the next few years. Some 70% of the combined network seems likely tobe retained probably to improve capacity. Vodafone and O2 have also entered into a similar agreement, andanticipate savings of “hundreds of millions” as a result. Orange, following a merger with T-Mobile announcedin September 2009, are planning the decommissioning of some 8,000 masts (almost 50% of their network)with an estimated saving of some £620m over the next 4 years.
This venture may even lead to a single infrastructure network.
Such integration is however not without its difficulties. RAN sharing arrangements are difficult to distinguishfrom site sharing.
The T-Mobile/H3G model is for the assignation of leases into joint names giving rise to two tenants andpotential management complications as well as increased compulsory powers under the ElectronicCommunications Code. MBNL, the joint venture of T-Mobile/H3G, have fallen short of their ambitious targetfor completing such assignments. There is now clear market evidence of substantial premiums andfavourable adjustments to lease terms being agreed with landlords to facilitate such consolidation.
In the Vodafone/O2 Cornerstone Project, ground rents of combined sites are being split 50:50 and thesecompanies are offering a percentage payaway to the landlord based on this arrangement rather than true siteshare values.
DecommissioningIt is clear that the operators are looking at the rents paid for sites against the revenue generated, albeit suchsensitive information is not shared with landlords.
In the current market, some operators are bringing pressure to bear on their landlords by offering lower rentsor threatening to decommission and break the lease thereby testing the landlords’ resolve. How many ofthese threats will actually be followed through has yet to be seen: rent is only one of a number of overheadsand is unlikely to be the principal issue.
Our analysis of radio mast leases reveals that a large proportion of break clauses are conditional whereby thelease could not actually be broken for as long as the site could transmit and receive signals.
Operators may also face considerable difficulty in obtaining planningconsents for alternative sites. Planning consent runs with the land notthe operator. Statutory Instrument 2553/2003 requires the operatorto satisfy the planning authority that use of the existing site is nolonger practicable (there is no test of reasonableness in respect ofthis requirement). Relocation is not a cheap option at a time offinancial stringency within the industry. Reinstatement of the average15m mast, including the removal of foundations and cabling etc,varies but is commonly in the order of £18,000 and the costs ofbuilding the same mast elsewhere is likely to be in the region of£80,000 including acquisition costs and planning. Operators maywell have to accept holes in their coverage, particularly in rural areas,which may, in time, translate into loss of custom - the main reason forcustomers switching networks (‘churn’) is poor reception.
In response to this difficult market and in the light of interest inrenewable energy, Strutt & Parker are building upon theirconsiderable experience of both sectors to develop alternative usesfor radio mast sites. The existing infrastructure may be re-usable formicrowind generation, which could result in similar returns to therevised rental guidelines now being offered by many telecomsoperators at lease renewal.
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Every effort has been made to ensure the information provided within this document is fully accurate. However, Strutt & Parker accept no responsibilityif recipients should act upon any of the information without seeking the appropriate professional advice. Reproduction in whole or in part withoutwritten permission is prohibited. Your name and details may be held on our database unless you instruct us otherwise. © 2010 Strutt & Parker.
www.struttandparker.com
About UsOur Telecommunications Group comprises of 28dedicated specialists across the country. This expertiseenables us to offer advice tailored to the needs of ourclients maximising the opportunities that the industrycontinues to offer, whilst avoiding the pitfalls. Our wideand comprehensive understanding of the industryenables us to advise on every aspect of the market.
• Rent reviews
• Lease renewals
• Site sharing and marketing
• Multi-site agreements
• Management
• Sales and acquisitions
• Upgrades and re-negotiations
• Expert valuation evidence
• Decommissioning
• Alternative uses
Contact detailsNorth West, West Midlands and WalesRobert Paul01743 [email protected]
North EastTom Parish01670 [email protected]
South WestTim Olliff-Lee01722 [email protected]
ScotlandIan Thornton-Kemsley01330 [email protected]
East MidlandsJeremy Dawson01780 [email protected]
East AngliaAlexander Creed01245 [email protected]
South EastCharlotte Kershaw01273 [email protected]
Offices in:Banchory, Brighton & Hove, Cambridge,Canterbury, Chelmsford, Chester, Chichester,Cirencester, Edinburgh, Exeter, Farnham,Glasgow, Guildford, Harpenden, Harrogate,Haslemere, Inverness, Ipswich, Kingussie, Lewes,London City Office, Ludlow, Market Harborough,Moreton-in-Marsh, Morpeth, Newbury,Northallerton, Norwich, Odiham, Pangbourne,Princes Risborough, St Albans, Salisbury,Sevenoaks, Shrewsbury, Stamford, Winchester
For full details of our offices please visitwww.struttandparker.com
www.struttandparker.com