Thursday 12 December 2019

The right moves: What will rent reviews bring?

Dundrum Town Centre
Dundrum Town Centre

Paul McNeive

After all the controversy about replacing the traditional "upward only" rent reviews with "upwards and downwards" reviews, market forces have dashed the hopes of tenants hoping for a lower rent in the first cycle of "five yearly reviews." All new leases since February 2010 incorporate the new "upwards and downwards" provisions but a recent surge in rents as the economy recovers mean that it is hard to find a tenant who achieved a reduction in rent over the last year.

I estimate that by now up to 20pc of all the rental stock in Ireland is on the "upwards and downwards" regime and the first of these were up for review in 2015.

The lack of supply of office space has seen many office occupiers taken aback by sharp increases in their rent this year as demand has driven rents for prime new space back to €550 per sq m. Whilst it has taken 10 years to get back to this level, this is already very close to the "boom years" peak rent of €600 per sq m.

The retail sector was the focus of the rent review debate and particularly on the prime streets. Retailing has been the slowest area to respond to the economic recovery and this time last year many retailers could have confidently expected a reduction in rent.

However many are suffering the shock of a 20pc increase in rent, due to a sudden surge in rental values in the last six months on Grafton Street and Henry Street. So landlords and tenants can be lucky or unlucky, depending on market conditions at the time of the review.

Increasing rents are not being driven by "greedy landlords" as is often perceived, but rather by retailers competing with each other for shops, and the only reason they are doing that is because turnover and profits are increasing.

On the other side of the coin, it's worth remembering that retail landlords with existing long leases, who had a review in 2004/5, will probably not see any increase for 15 years from when those rents were last fixed.

There is a big difference between the retail and office sectors in that it will probably be at least another five years before retail rents get back to their peak of 2007/8. For example, on Grafton Street peak rents were €10,000 per sq m back then and they are now going for around €5,000 to €5,500 per sq m.

It's a similar story in the suburban shopping centres and in Liffey Valley, for example, "zone A" rents are up to €2750 per sq m, well off their peak of €4,000, but too high to warrant a downwards review. The only exception in the country is Dundrum Town Centre where top rents are already back to the "Celtic Tiger" peak of €5,000 per sq m.

Whilst I suspect that there may be cases of peripheral retail properties in the regions, where the rental value has in fact decreased since 2010, there is little evidence of downward reviews. I suspect that this is a combination of landlords "keeping their heads down" and not triggering reviews and tenants, who got in at what they saw as the bottom of the market, not being aware of a potential reduction.

It's the same picture for industrial property where rents reduced after 2010 but again have risen over the last year, preventing tenants from seeking savings at review.

A welcome development is that the 2015 rent reviews are the first full five yearly review cycle under the "Arbitration Act 2010." The Act requires an Arbitrator setting the new rent to explain his analysis of the evidence and give reasons for his decision.

From speaking with numerous agents around the country it appears that there is some variation in the interpretation of this, and of compliance with the act.

Arbitrators must make a genuine effort to meet these requirements so that both parties are clear as to how the decision was arrived at.

At the end of the day, no matter which way you try and influence rents, the market always decides.

It was an honour to speak to a large group of Bank of Ireland's business customers at the Maryborough Hotel, Cork, recently. John McAllen, Regional Business Manager, told me that the bank approved €3.2bn of new credit to the end of September 2015-an 18pc increase on the same period last year.

Underlining the positive mood in Cork, the owner of the Maryborough Hotel, Dan O'Sullivan told me that business seems to be very good and improving strongly.

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