At the heart of the UK property industry lies the long-term lease. A building with a "triple-net" lease, as it is known, is the property investor's dream. And if the tenant is a top-rated credit, better still. Conventional wisdom has it, in fact, that traditional institutional investors will simply not buy buildings unless they are leased in this way. This view, arguably, has served to perpetuate a UK leasehold structure which punishes tenants.

However, there is a small but growing view that there is money to be made from offering short-term, flexible leases, as a handful of providers are finding.

Consider Workspace Group, a £71 million sterling quoted UK company created out of a rump of properties owned by the former Greater London Council. The company offers industrial and office space to tenants on standard leases of no longer than three years, terminable without penalty at three months notice. Tenants, for the most part, are small businesses, many of them start-up ventures.

While an institutional investor might view these terms as disastrous, Workspace has found value. According to Investment Property Databank, the UK property performance measurement service, Workspace - which recently changed its name from London Industrial - had returns for the year ended September, 1997, of 22 per cent, beating the 1997 IPD All-Fund universe return of 17.8 per cent.

This outperformance had been repeated in earlier years, according to IPD. Over three years ended September, 1997, Workspace had returns of 16.6 per cent against an IPD benchmark of 10.9 per cent and over four years, returned 15.7 per cent against an IPD benchmark of 11.3 per cent.

When measured against its peers in the 232-fund IPD index over four years, Workspace turns up in the 99th percentile of performers, slipping to the 98th percentile over three years and to the 94th percentile over one year.

Moreover, it achieved its returns despite a substantially higher vacancy rate at its properties, not surprising given its lease terms. While the average vacancy rate was 3.7 per cent over the three years ended December, 1997, Workspace experienced a 9.2 per cent vacancy rate.

In the six months ended September, 1997, the company's pre-tax profits rose 11 per cent to £2.5 million, while in the year ended March, 1997, and in the fiscal year ended March 1997, pre-tax profits rose 16 per cent to £4.8 million.

Of course, these results must be viewed with several caveats. The Workspace results look good against the broad benchmark, but a portfolio of, for example, London West End properties would be likely to have produced annual returns of 12 to 15 per cent in each of the past three years.

Also, there are very few UK listed property companies in the IPD annual index, and two of the largest, British Land and MEPC, do not have December year ends and do not figure in total return calculations.

Is it reasonable to compare the performance of an entrepreneurial property company with that of a relatively passively-managed UK pension fund or a life insurance fund?

For its part, IPD groups listed property companies with other "specialist" fund managers, such as limited partnerships and the Church of England, and these were the best performers last year. But Workspace, in 1997, even outperformed that group, which earned average returns of 20 per cent.

Harry Platt, Workspace's chief executive, says the company's formula cannot be repeated elsewhere without intensive management. "We were formed 10 years ago just to prove to institutions that with intensive management, you can make money out of short leases," he says. "You can get good rental growth and good capital growth."

All management is done internally and the larger estates all have "caretaker" managers on-site who know each tenant personally.

The company offers additional amenities on some of its sites and is packaging some external services for clients.

Tenants who bring a new tenant to the estate are rewarded with the delivery of a Fortnum & Mason food hamper and Workspace plans to set up a Web site allowing tenants to advertise their goods and services to each other.

Small businesses, he points out, do not intend to remain small forever and their occupancy needs change constantly. "Normal property companies do not work on weekly supply and demand," he says, noting that he is constantly at risk of losing his entire tenant base within any three-month period.

That does not worry him, he says. To break even, the company only needs a 60 per cent occupancy rate and even in the depths of the recession, the rate never fell below 75 per cent. It seems that tenants felt more comfortable signing shorter leases in the recession and new business was not a problem.

"We run this business like a hotel company," Mr Platt says.

A hotel for businesses?

David Tye, chairman of Rugby Estates, another company that is trying to make money out of flexible leases, says that is some of the most profitable space on offer in London. "The most flexible accommodation you can get anywhere is a hotel room," he argues. At typical five-star London hotel rates, that comes out to roughly £400 per square foot per year, far outstripping the best West End office rents.

Both individuals and businesses, it seems, are prepared to pay more per square foot for short-term leaseholds.