Upward-only rent ban ‘would wipe €14bn from property value’

Author Gavin Daly. The Sunday Business Post. 3rd July 2011.

The state would have to pump another €5 billion into the banks and pay out €1.8 billion in compensation to landlords if it banned upward-only rent review clauses, according to new research.

A study prepared by DKM Economic Consultants for the Irish Association of Investment Managers (IAIM) estimates that up to €14 billion would be wiped off the value of commercial property by a complete ban on upward-only clauses. Landlords would be likely to sue the state for ‘‘state interference in private contacts’’, DKM found.

Even if a legal challenge failed and the clauses were banned, the state would still face a massive bill.

‘‘The additional losses (over any existing provision) to lenders are at a minimum €6 billion, of which circa €5 billion would be incurred by banks or institutions owned or funded by the exchequer,” said DKM.

That includes a hit that would have to be taken by the National Asset Management Agency (Nama),which has taken over the loans of the Irish banks on terms that suppose upward-only reviews would remain in place.

The upward-only reviews have become a major issue, with retailers claiming they are putting shops out of business.

However, the DKM research said that rents would be higher if upward-only clauses were not allowed in lease agreements. It said that a call for the clauses to be banned failed to recognise that many landlords gave tenants other inducements – including rent free periods and fit-out expenses – to accept longer leases with upward-only clauses.

DKM’s research also found that 76 per cent of all retailers who sought rent relief from their landlords had been successful, after providing accounts based evidence that rents were a major factor in their situation.

DKM said that jobs in the retail sector ‘‘would not be revived solely by a change in the terms of lease agreements’’.

It described as ‘‘implausible’’ a claim that 30,000 jobs could be saved by banning upward only rent reviews, and ‘‘highly implausible’’ that 20,000 extra jobs could be created if they were banned.

It said that the potential benefit of saving jobs set against the risk of banning the clauses and facing billions of euro in costs ‘‘makes no economic sense’’.

Frank O’Dwyer, chief executive of IAIM, said the association would welcome a quick resolution of the issue, as uncertainty was deterring investment in Irish property.

‘‘At its peak, there were €3 billion-worth of commercial property transactions a year,” O’Dwyer said.

‘‘In the first half of 2011, it looks like it was under €10 million. ‘‘There are virtually no transactions taking place. It is a very complex issue and we would welcome certainty.”

Frank Daly, chairman of Nama, also said last week that uncertainty was deterring potential investors in Ireland. Alan Shatter, the Minister for Justice, is expected to bring the heads of a bill abolishing upward-only rent review clauses to the cabinet in the coming fortnight. It will then be referred back to the attorney general, Máire Whelan.

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