Tuesday, March 29, 2011

Profits down, rents up | The Post - This has to be the craziest property story!

Profits down, rents up
27 March 2011 By Samantha McCaughren Business Correspondent

Over the last three years, shoppers have become less inclined to part with their cash, so it may seem strange to hear about rent increases for retail tenants around the country, with the latest hikes coming for stores in Dundrum Town Centre.

Oasis and Coast, run by Ian Galvin’ s Aurora Fashion group, were both hit with rent hikes of more than 50 per cent this month.

The stores will have to pay an additional €100,000plus in rent.

The rent increases in streets and centres around the country are not just being pushed through by landlords, but often follow an independent arbitration process.

Retailers claim the arbitration process is weighted in favour of landlords, while others involved insist that it is fair, and more complicated than it appears.

Arguments put forward by those in the property market to back rent increases include the fact that rents have been unchanged in Dundrum since it opened in 2005. Dundrum rents are also lower than in other premium shopping centres, such as Liffey Valley.

However, Retail Excellence Ireland claims that some shops will close if higher rents are forced through.

The controversial arbitration system chooses arbitrators from a panel nominated by the Society of Chartered Surveyors.

A report from the working group on transparency in commercial rent reviews said last year it was ‘‘clear that there was a perception among some retail tenant interests that the arbitration process was inherently biased in favour of landlords’’. It found no objective evidence of bias, but said ‘‘the perception was real’’ and needed to be addressed.

Suspicion about the process remains.

There are claims that arbitrators are too closely linked to the property market to consider recommending lower rents.

One of the more contentious issues is that of side deals, whereby headline figures set a new market rent, but sweeteners are included in separate documents.

There are differing views as to whether or not these side letters ever make it into the public domain. Blaine Callard, chief executive of Harvey Norman’s Irish stores, said he had no faith in arbitration.

‘‘The arbitration process is an ineffective mechanism," Callard said. ‘‘It is based on this old real estate assumption that rents and property prices only ever go up.

The whole problem is that everybody involved in that process inevitably has some vested interest in the property market.

‘‘There is this huge momentum stacked against any kind of recognition that the rents agreed during the boom are completely unrealistic.

The arbitration process, in its current form, is part of the mechanism designed to maintain this facade that the shopping centres are still worth what it says on the balance sheet."

Harvey Norman has 14 stores in the Republic and two in the North, employing almost 800 people.

‘‘Rents being offered in some stores next door to me are half what we’re paying," Callard said. ‘‘It’s all under the table, and they sign people up on a higher rent and then do a side letter, so you can’t even prove there is a cheaper rent.

There could be a year free of rent or key money, so when you actually add all that together, rents are effectively 30 to 50 per cent lower."

Callard said it was not practice for side letters to be made available to other tenants.

‘‘You have a whole two speed market," he said.

‘‘It’s not a level playing field. We have a well-capitalised, foreign parent that’s profitable, so we have a long-term commitment to Ireland. But unfortunately, for a lot of the small to medium-sized retailers, the money under the mattress has run out. This is the crunch year."

Another retailer, Colm Sorensen of Butlers Chocolates, was also critical of the arbitration system. The luxury chocolates group owns 14 outlets in Ireland, including one in Dundrum Town Centre where it has been issued with a demand for a 100 per cent rent increase. The company has not gone down the arbitration route, however.

‘‘I think the process is very flawed," Sorensen said. ‘‘I think it is open to serious manipulation by the landlord."

Sorensen also said that secret side deals pushed up top line figures to give the impression of higher open market rents and claimed that new rental agreements were often timed to make sure the highest possible comparatives were in place ahead of rent reviews.

He said that, in one instance in Dublin, he believed a landlord struck a high-rent deal with a high-risk tenant to set a new headline rent.

‘‘A landlord wouldn’t normally let a property to a man with no assets, except for the fact that he would pay high rents," he said. ‘‘And then we were all brought up as a result of it."

Sorensen was also critical of Nama’s role in the rental market.

A number of properties, including Dundrum Town Centre, are now in the hands of Nama.

‘‘Nama employs developers to get tenants’ rents up," Sorensen said. ‘‘Nobody mentions Nama, but a government agency is behind a very high rent review request."

Barry Smyth, a member of the Society of Chartered Surveyors, who sat on the review group on commercial rents, insists that the system is fair.

On the issue of rent increases being recommended at a time when revenues are falling, he said that ‘‘generally, the tenant’s turnover and goodwill is not taken into account’’.

‘‘There are rents that are tied to turnover specifically, but for the majority of businesses, the turnover doesn’t come into it," Smyth said.

‘‘Because you could have a situation that you had a lazy tenant. And if turnover is booming, tenants may not want to reveal their turnover and have to pay a higher rent because of it."

Smyth also said that previous rental agreements, with introductory sweeteners, were not taken into account when seemingly large rent increases were reported on.

‘‘It must, to some degree, depend on when the rent was previously fixed and whether or not there were special conditions attached to the original rent," he said. ‘‘So looking at percentages doesn’t give the full picture.

There may well have been some incentives in the early part of the lease, which means an increase is justifiable." Another reason for a rent increase could be improvements to a retail development.

‘‘A location may have changed positively and, even though overall trade may be down, the specific location may not be down," Smyth said.

He also said that both the tenant and landlord presented their cases during the process.

‘‘The arbitrator is an independent person in a quasi-judicial position," Smyth said. ‘‘He must make a decision based only on the evidence that’s put to him. And both the landlord and the tenant have equal opportunity to be represented at the arbitration."

Smyth rejected the suggestion that arbitrators were biased towards property.

‘‘If I were asked to do a rent review on Grafton Street, and I happened to act for the landlord next door, I would decline that appointment, because it wouldn’t be appropriate," he said.

‘‘You can assume that, in any sort of rent review, the tenants are represented by valuers.

There may be some firms that are more readily identified with landlords, and some more with tenants."

He said it would be unlikely that an arbitrator would more closely identify with landlords. Smyth also said that side letters were fully available to retailers and their representatives.

‘‘The tenant’s valuer is quite entitled to get all that information," he said. ‘‘If it was being hidden by a landlord, I think the arbitrator might look somewhat askance at that."

The Sunday Business Post spoke to one retailer who said that side letters were included in his arbitration process, but a sizeable rent increase was still recommended.

Dozens of tenants in Dundrum have sought to go down the arbitration route, while many more retailers around the country are resisting rent increases.

With no sign of a return to spending growth by consumers, relations between tenants and landlords are likely to be strained for quite some time to come.

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