VALUERS are used to having to contend with changed fundamentals but short leases are causing difficulty. There is now the conundrum of assessing the value of two adjoining buildings, where, in one case, there is an old-fashioned lease with 25 years unexpired, and in the other case, a modern lease with tenants break clauses operating at five-yearly intervals.

The office market is trying hard to reconcile these differences and a pattern is emerging whereby rents are liable to variation, depending on the lease term - for example, there may be a 15/20-year straight lease with no break at a rental of £15 per square foot and a similar lease with a five-year break at a rental of £17 per square foot.

This adjustment in rental terms is rational, but the larger issue remains as to how the shortness of such leases measures up to institutional demands and how valuers react to this.

There may be more practical aspects appearing, as to legally operate a break clause a tenant must have abided strictly with all the lease covenants and terms and it may not suit the tenant to have to relocate with the onset of high adaptation costs elsewhere at a time in the market cycle not of their choosing.

It is fair to say that not many of the current shorter leases are being offered around the market in investment properties. However, this may shortly manifest itself with the start of new development schemes ready in 1997/1998. There is also the impending sale of the Aranas office buildings, which may show whether institutional reservations will relent.

So far in non-tax-designated areas, well-located high-profile pre-let office buildings have been satisfactorily placed out with institutions where break clauses do not occur until after the 10th year and where the tenant must provide a year's advance notice and pay a penalty.

Capitalisation rates have hardened slightly over the last two years but not to the extent that they did in the 1979/1980s and 1988/1990 peaks when interest rates were higher than at present.

Another aspect of the shorter leases is the effect they have on rental values. The more established/old-fashioned leases rely on the presumption that, at review, rent is to be assessed having regard to the unexpired balance of that lease on the same terms and, of course, without any rent breaks.

Where is the evidence if no new lettings are being made on these terms?

These older leases are without the hypothesis that is introduced in current rent review clauses where for the purpose of assessing rental value, the existence of any rent-free period or break clauses are ignored and the headline rent is to be that applied at rent review.

Is the short-term lease going to allow for steady rental growth?

The tenant will have the break clause to bargain with the outcome will be most interesting and will keep valuers busy but I suspect tenants will continue to come off best.

Given the potential problems it is perhaps not surprising that the appetite for institutional investment in property has declined and the average fund now has between 6 per cent and 8 per cent of its assets in property. It is a truism that if they are below 5 per cent, property holdings will have little if any significant effect on the fund's overall performance.

It is hoped that some fund managers will go for out-performance and see that property gives a similar yield to bonds with fewer risks; otherwise the tendency may be to ignore property altogether for the time being.

This situation will provide private investors and investment companies with opportunities, but these must be backed up with hands-on management and sufficient size and spread in other property holdings so as not to be overly exposed to break clauses.

it's ironic that banking authorities have been so over-eager to create business; with some element of foresight they could have made it a condition of lending that minimum lease terms be upheld. This in turn might have prevented the weakening of the lessors position.

This protection can be seen in practice in the International Financial Services Centre in Dublin where no initial lettings permit breaks within the 25-year period.

The retail sector is the exception where leases have not been diluted and it is still possible to make lettings on even up to 35-year terms with five-yearly, upwards-only reviews and no breaks. Recently, this scenario has applied to the new shopping centres at Blanchardstown and Jervis Street and demand in Grafton Street at the moment would easily tolerate these terms if there were premises available. In the latter case, currently the only opportunities are for leasehold deals at substantial premiums where tenants would much rather pay the full rent if they had the chance - taking a short lease does not enter into the equation.

Finally, it should be said that in property terms, Ireland is tending to follow the practice in other European countries (except for the UK) where short leases have always been the rule and prices/ values have settled to almost as strong levels comparatively speaking as hag the UK lease structure been in place. Historically, the reasons are different in Continental countries, where annual indexation of rents is provided by law in most countries and leases are to a maximum of 9/10 years with mutual break clauses at 3/5-yearly intervals.

Irish practice has resulted more from the financial accounting rules of US manufacturing companies locating here than Continental practice. In the US, lease commitments must be shown as a balance sheet liability. Accordingly, US companies have insisted on break clauses and this may be a partial reason why Ireland has successfully gained so many US businesses.

In France, even with indexation, the market, along with many other countries, did not escape the collapse in the 1989/1993 recessionary period.