FG/Labour policy on reform of rent reviews dangerous and foolhardy.

Lauder

Both FG and Labour have proposed policies on the reform of commercial rent reviews in Ireland. FG have proposed to allow all tenants, regardless of contract, to request a market rent review within one year, while Labour has proposed to legislate for the retrospective removal of upward-only-rent reviews from leases. While there is clear demands for such reforms from struggling small retailers and tenants, but proportionality is required - many tenants (particulary big tenants) are doing well and will abuse the rent review reforms. We need to look towards the Australian example, where struggling tenants are given downward rent reviews. Only tenants who cannot pay their current terms are supported and highly profitable tenants should stick to the terms they agreed to.

Other arguments:
Punishing landlords will cost us all - The Irish Times - Wed, Feb 16, 2011

Abolishing upward-only rent reviews will be bad for tenants in the long run

Below are my thoughts on the effects of such reforms:

The recent discussion on the issue of rent reviews has centered on the
difficulties faced by the retail sector, with much of the populist blame
being placed on the inclusion of upward-only-rent review (UORR) clauses in
lease contracts. The proposed policies of FG & Labour have already gained
popular support from the retail sector and with the general public who seem
to blame all their failings on property developers and investors. However,
as correctly highlighted by Nowlan such policies may further damage the
commercial property sector, and more worryingly may damage the future of
investment in Irish property.

The concern is quite clear. The introduction of a retrospective ban on
upward-only-rent-reviews (or forced rent reviews) would have serious
consequences on the future on property as a secure investment, and would
massively dent the attractiveness of property as an asset.

Commercial property currently displays much of the characteristics of bonds
(the traditional secure assets) in terms of a secure, guaranteed cash flow
(rent). The volatility and risk of this cash-flow is low and this is why
property is attractive to pension funds and other low-yielding investments.
The removal of a guarantee of cash-flow would seriously derogate the
attractiveness of the asset, and would see further exodus of funds
investing in it, thus severely hitting prices and subsequently pension
funds, property funds, construction and development sector.

Meanwhile, the Irish commercial property sector is in desperate need of new
international investors, Irish banks and funds need cash, but the asset
will only be attractive if the risk of the cash-flow is low. Fine Gael &
Labour should be proposing positive policies to stimulate the commercial
investment sector and in particular the need to attract foreign money. Yet,
their proposals would further drag the market downwards and will have
negative effects for all areas of the industry - including occupiers. We
must remember that these further falls in the property market will only
result in the Exchequer picking up the bill (through NAMA).

Our politicians need to realise that such reckless policies will severely
damage the commercial sector, to such an extent that it may never recover.
For the sake of encouraging foreign investment, moving these assets off
Irish balance sheets and trying to inject cash-flow in the domestic market,
it is crucial that such policies are not enforced. Do the incoming
government really intend on reducing property values that much?

The effects of increasing risk in the commercial property sector caused by
such a policy would have serious consequences. With the chances of NAMA
failing greatly increased - and the destruction that would bring to the
wider economy is unthinkable.