Tuesday, April 5, 2011

And the other side of the Rent Review argument, from The Irish Times


THE NATIONAL Asset Management Agency (Nama) has warned that proposed changes to rent legislation would “significantly impact” on its ability to repay the debt it has issued.

The agency is “very concerned” about the impact any move to allow retrospective rent reviews could have on the value of its assets. Any such legislation would have a “dramatic reduction in the value of the income-producing assets transferred to Nama” because investment properties are valued on a multiple of their annual rent.

In a letter to the Department of Finance, Nama chief executive Brendan McDonagh and head of portfolio management John Mulcahy point out that the loans being transferred to Nama are done so on the basis of their valuation in November 2009, and the loans were “assessed and valued on the assumption that existing contractual lease terms prevail”.

Any change in the law “would mean that Nama would have effectively overpaid and would of necessity be required to continue overpay (sic) the various participating institutions for bank assets that Nama acquired and will acquire from them”.

The letter says it is important to consider the beneficiaries of the changed law.

“This would comprise tenants across all commercial property sectors, including retail, office and industrial property.

“It is widely accepted that the effect of rent on business viability in the latter sectors is nominal.

“We would suggest that the majority of large tenants (some international high street names) are in a position to bear the burden of the contractual rent due to the existence of other profitable stores located both within and outside the Irish jurisdiction,” it said.

“Consequently, such arbitrary action would disproportionately benefit a majority of tenants not requiring such support at significant cost to the Irish taxpayer and fail to direct efforts at the minority of perhaps domestic retail tenants requiring genuine support.”

The letter was sent last May to then minister for finance Brian Lenihan.

It was released to The Irish Times under the Freedom of Information Act.

It added that its review of retail portfolios being transferred to Nama showed landlords had given “widespread support” to tenants, via rent reductions, where the contracted rent jeopardised their clients’ business.

It said that a move to allow retrospective rent decreases would damage Ireland’s perception abroad, in turn damaging the prospects of any future external investment in the Irish market and also damaging the wider investment market.

“The direct implication of this will be to restrict Nama’s future ability to refinance or dispose of their property portfolio to non-domestic investors.

“Such non-domestic investment will be an essential ingredient to the success of the Nama project,” it said.

It also warned that any changes would also affect Irish pension funds and insurance companies. This would erode the value of pension funds, and could result in increased insurance payments by individuals and businesses.

Nama also pointed out that previous interference in “freely-negotiated landlord and tenant arrangements has led to unforeseen and usually unhelpful results”.

It cited the rent freeze in the 1970s in Britain which “led directly to the secondary banking crisis which almost took down the UK financial system”.

It also said that at about the same time in Ireland the minister for finance had directed that all State leases were to have upward and downward reviews.

“We understand that this measure was subsequently rescinded by the OPW after a few years due to its unhelpful and unintended consequences,” it said.

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