Monday, February 21, 2011

Commercial rent is a zero-sum game -

IN a recession as deep as this one governments have to make hard choices, inevitably disappointing some constituencies and pleasing others.

So it is with Ireland's collapsed property market. On the one hand are embattled retailers seeking relief on boomtime rents, on the other hand are landlords and investors seeking to protect their rental yields as the value of their fixed assets plummet.

Unfortunately, when it comes to commercial rents it is a zero-sum game.

Whatever concessions a retailer makes, is a gain for the landlord and whatever concessions a landlord makes is a gain for the retailer.

The decision by a consortium not to buy Liffey Valley shopping centre, reportedly because of concerns over the rules on leases in Ireland, shows how divisive this issue has become.

During the boom years the issue of leases rarely surfaced in the public domain and retailers were making healthy, some argue extortionate, profits.

But since 2008 two things have changed the relationship between landlord and retailer -- revenues in the retail sector have plunged; while on the landlord side the capital value of buildings has slumped, putting many of these investors under pressure with their banks.

The end result is that neither side can afford to be a price taker when leases are getting negotiated.

Up to now leases in general could only go upward when being re-negotiated, but the current government made a change in 2009 which meant that all leases from February 28, 2010 onwards could be lowered.

This sent shockwaves across the commercial property market and forced down the price of Irish real estate.

But Fine Gael and Labour have gone further, talking about removing the upward-only rent review rules even from leases before February 2010.

This idea appears to have made the Irish commercial property market very unappetising to outside investors, such as those who were going to buy Liffey Valley, one of the State's largest retail developments.

Of course many of the investors depending on rental income in Ireland don't operate in this jurisdiction, and essentially repatriate the profits elsewhere. But equally many retailers are in a similar category.

Like the original conflict between retailers and landlords, this turn of events means different things to different people.

For retailers it is welcome, meaning that future rents -- when reviewed -- could fall as much as 53pc according to recent court judgments.

For investors, pension funds, insurance companies and even NAMA, it is a wholly negative development meaning their income flow is going to be sharply reduced and great uncertainty over their future yield is now a reality.

Whether Fine Gael and Labour actually make the change to leasing rules they are promising remains to be seen, but certain key investors have decided they are not waiting around to find out.

- Emmet Oliver

Posted via email from quirkeproperty's posterous

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