Business Irish

Monday 27 March 2017

Occupiers to switch from renting to owning

Increased owner-occupation and more short-term leases are expected to result from impending changes to accounting regulations.

The prospect of more occupiers following the lead shown by Google and Penneys will offer some hope to property sellers hampered by the stand-off attributed to the review of upward only rent legislation.

Andrew Watt, head of professional services at Knight Frank Ireland, recently warned tenants and landlords of commercial property to look closely at existing and future leases, taking into account the effects of changes to be introduced in 2014 under the International Financial Reporting Standards (IFRS).

Speaking at an IBEC-hosted seminar held jointly by property consultants Knight Frank Ireland and tax auditors and accountants BDO in Dublin, Andrew Watt noted that values in the commercial property investment market overall have fallen by 61pc since their peak in 2007 and the market currently is more or less stagnant.

He noted that in the office market, Dublin City is seeing some lettings, with much of the market movement coming from new overseas entrants.

Over-renting

"Clearly over-renting is a big problem for occupiers, as well as for landlords and the banks. There is an increasing demand for short-term leases and flexibility in leases such as more break options. This trend is set to increase dramatically as a result of the proposed changes to property lease accounting".

"Traditionally, occupiers have opted to rent so as to keep property off the balance sheet and be able to use capital elsewhere, but it will now make sense to put it back on the balance sheet by buying instead," he said.

"So I believe that going forward the market will see a growing trend towards more owner-occupation".

John O'Callaghan, audit partner, BDO told the seminar that under the new rules property leases would now come 'on balance sheet', in a manner similar to how finance leases are currently treated.

For example, with a car lease you bring the car on balance sheet as an asset and also bring in a corresponding lease liability.

Asset value

As a result, the asset value of a property lease, called right to use, would be calculated on the basis of net present value of rent payments to be made over the entire life of the lease.

There would be a corresponding liability also recognised.

By increasing both assets and liabilities, debt ratios and other ratios would change.

The question of impairment of the lease asset from a lessee perspective was outlined with an example of a 25-year lease at an annual rent of €425,000 being signed in 2007 and then a comparable premises being let in 2009 at €250,000 per annum.

This would require a writedown of about €2.3m reducing profits (and possibly reserves available to pay dividends) and net assets.

Irish Independent

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