Upward-only rent review will tell a lot about reform hopes


BUSINESS OPINION:If we want to compete, costs – including commercial rents – must be competitive

THE DEBATE over upward- only rent reviews is starting to take on a significance beyond the narrow grounds of what it means for the commercial property market and property prices generally.

It is showing all the characteristics of a battle between a small but powerful vested interest and a Government endeavouring to act in the wider public interest.

Normally in Ireland the vested interest wins such contests. How the upward-only rent issue plays out will say a lot about how realistic are hopes of bringing about long-overdue structural reforms needed if Ireland is to regain economic competitiveness, many of which have been mandated in the programme agreed with EU-IMF.

Among those targeted in the next phase of the programme are legal and medical fees as well as pharmacies.

Success will ultimately depend on whether the Government parties – and Fine Gael in particular – are up for a fight or fights that will bring them into direct conflict with groupings that have historically been natural parts of their constituencies.

In the case of the plan to change the law in order to allow commercial tenants to get out of upward-only clauses in their leases, the Government’s opponents are pretty much everyone who has a financial interest in commercial property valuations and rents remaining high.

These are primarily landlords, particularly landlords who are heavily borrowed. Taking up the cudgels on their behalf are various property industry experts who claim that any change to the current landlord-friendly regime will destroy the investment market.

The National Asset Management Agency (Nama) is also not keen on the idea on the basis that its job will be made harder if the rights of commercial property investors are diluted.

Economic myopia is an occupational hazard for property professionals, but Nama at least must know that the only real support for commercial property prices is rising employment and economic growth.

Both of these just happen to be the priority of pretty much everybody else in the country and the consensus is that the only way short of a miracle for Ireland to achieve these twin goals is to recover lost competitiveness and increase the exports of goods and services.

Its simply laughable to suggest that the legal enforcement of boom time commercial property rents is compatible with this objective. It is obvious that if Ireland is to be competitive then costs across the economy – including commercial rents and prices – have to be competitive. That means below the prices charged in peer locations, which we have hopefully realised by now are more likely Coventry than Canary Wharf.

The problem of course is that those who will be hurt hardest in the short term by this necessary readjustment – highly leveraged landlords – are arguably among those best placed to do something about preventing it.

The number of middle-class professionals and businessman involved in leveraged syndicates put together by financiers such as Derek Quinlan – and also the mainstream banks – is unknown, but one suspects quite terrifying.

If their tenants are allowed to get out of upward-only rent clauses, it may prove the last straw for many of these syndicates and individuals.

Hampering economic recovery so they and other landlords can delay the inevitable a little longer is simply not an option, but bankrupting them by the hundreds would not be terrible clever either, given the pivotal role of some of them at least in generating economic activity.

The obvious solution lies is the newer, smarter, personal insolvency regime that has also been promised as part of the economic reforms mandated by the EU-IMF.

However, someone will still have to foot the bill as all these leveraged property deals unwind and in the first instance it will be the bank that funded them. In the second instance it is the taxpayer.

The important issue here is that if the recently conducted stress test are all they are cracked up to be, then we have already agreed to pony up the money.

The opponents of the Government’s plans have correctly pointed out that the stress tests did not specifically allow for the consequences of changing the law on upward-only rent reviews. This is somewhat disingenuous though as it deliberately misrepresents the nature of the tests, which did not allow for hypothetical changes to specific policies, good or bad.

What they have done is enable the banks to take huge losses across all their lending books as they materialise.

The indirect socialisation of the debts of commercial property investors implied above raises the same moral hazard issues as the notion of debt forgiveness for mortgage holders raised last week by AIB.

The argument is the same. If you do not lance the boils, they will fester and act as a drag on the economy and recovery. Commercial rents will not fall because leveraged landlords will fight for survival and people will not spend because they are crushed by mortgage debt.

Competitiveness will not improve and domestic demand will stagnate. It is a simple case of the greater good, which is the basic organising principle of society.

It is a principle that will be tested if and when the Government seeks to implement the other structural reforms mandated by the EU-IMF last week.