You’d have some sympathy for property companies these days as a catastrophic economic downturn still plays itself out. And as with other factors of production there is a general oversupply with prices still coming under pressure. Property giant and NAMA valuation panel member, DTZ Sherry FitzGerald has just produced three reports in respect of quarter one of 2011 examining the following:
(1) Dublin Office market – Like the Jones Lang LaSalle review covered on here this week, the report is upbeat pointing to an increase in the take-up of space but acknowledges a reduction in headline third generation prime rents to €30 psf and sees vacancy rising marginally, which is at odds with JLL which saw vacancy dropping marginally. DTZ say prime rents are now down 48% from peak. Putting aside the 210,000 Montevetro building acquisition by Google, the market is still looking pretty shaky. It is multinational technology companies that are credited with keeping the sector alive whilst indigenous companies falter. The report is the latest to acknowledge the current dearth of property under construction in the capital with only some 5,850 sq metres presently under construction. If the 20,000 sq metre Liam Carroll Anglo HQ gets the go-ahead of course, then we will be returned back to the same level of construction as in 2010. Rents continue to come under pressure and headline rents continue to be diluted by rent-free periods, now estimated to be two months in every 12 months and “other tenant inducements”. There is little analysis on offer on rental levels and the restriction of quoted rents in the southern suburbs to Sandyford is curious. There is no mention of Upward Only Rent Reviews at all, which is also curious. DTZ Sherry FitzGerald regard the following asDublin’s Central Business District.
Again an upbeat assessment with claims that prime industrial rents have “remained stable” at €70 per square metre (€6.50 psf). Coincidentally, as withDublinoffice space above, this also represents a 48% drop from peak. Take-up is stabilising it seems but at very, very low levels – take a look at the graph on page three of the report to see how take-up is now less than 20% of the peak. Again, it is multinationals taking up space, notably Amazon and Lidl in the quarter. Although DTZ stick with the claim that prime headline rents are €70 psm, it concedes that there are “numerous good quality buildings” available at €55-60 psm. The vacancy rate is nearly 25%. There is only one industrial property under construction at present, a 3,000 sq metre unit in the Fonthill Business Park in Clondalkin.
This reports primarily deals withCork, Galway andLimerickand concludes, not surprisingly, that the market remains challenging with oversupply and elevated, if stabilising, vacancy. There is an altogether unconvincing claim that rents are stabilising – the only analysis is on page 16 and is of “indicative rents” only. Not unsurprising either is the claim that new construction is drying up which might assist in returning the markets to some sort of equilibrium.
NAMA Wine Lake 
Real rents:
Prime D2 and D4: €27 per sq. ft.
Prime south centre Docks: €22 to €24 per sq. ft.
Blackrock: €15 per sq.ft.
Clonskeagh: €10 per sq. ft. (Current 120,000 sq. ft. letting)
Sandyford: €8 per sq. ft.
Leases: Total flexibility.
And THAT is the truth.
Extract The Fitzparick Tapes by Tom Lyons and Brian Carey Page 252 Chapter 3
“The bank did not exist inside a cocoon. It regularly sought outside views. Economist Rossa White of Davy stockbrokers, Mark Fitzgerald of top estate agency Sherry Fitzgerald, and Pat Gunne of CBRE, the commercial property consultants,were invited into the bank to make presentations to directors and executives. These external advisers voiced the consensus view that there was no bubble and that Ireland`s property market was heading for a soft landing. Predictions for economic growth ,meanwhile,were extremely bullish. the other leading stocking firms and estate agencies all took the same line ,and it was rarely challengened in the media“
These distinguished members of the Society of Chartered Surveyors failed to see the greatest property bubble in the history of mankind. These were the experts. The media accomodated this nonsense. I hope your blog is not listening to these exact same experts.
@John, I didn’t get a chance yesterday evening to respond to you fully so I would like to set that right, now.
“These distinguished members of the Society of Chartered Surveyors failed to see the greatest property bubble in the history of mankind. These were the experts. The media accomodated this nonsense. I hope your blog is not listening to these exact same experts.”
To begin with, it seems plain that your particular concern is the terms of commercial leases in Ireland. And it might be worth saying that this blog did adopt a position which leans towards the total abolition of Upward Only Rent Reviews. It is not an easy dilemma, few are these days and without meaning to be grandiose about it, I find myself these days describing the “trolley dilemma” from ethics more and more to people; that’s the dilemma where there’s a runaway trolley on a rail-line and tied to one track there’s one person and on another track, another person. You control the lever which will send the trolley down one track or the other, and one or other of the people will get killed. You’re deciding who gets to live. The dilemma is there to explore situations that are not black-and-white and jumping from that to commercial leases, reform is not black-and-white either. If the abolition of UORRs goes ahead, it will damage our reputation for lawfulness, it will cost landlords a lot of money, it will cause further damage in the banks and NAMA. The reason this blog leans towards the view it does, is because having a competitively-priced factor of production should tend to benefit society as a whole more than the damage that the current proposal will wreck. That’s a view & there are others that should be respected. I personally tend to have little respect for views on this matter which are black-and-white or which paint landlords as pantomime fat cat robber barons or tenants as feckless gombeens putting on a poor mouth when they can comfortably afford the rent. I note that one aspect of this that everyone agrees on is that the future of UORRs be determined quickly because the whole subject is interfering with the operation of the market.
As for members of the SCS and their role in the financial crisis, I have just gone through the €1.4m Nyberg report – link at bottom – for the second time, it is interesting to note how certain groups are identified as causes of the crisis. I cannot see blame being laid at some of the traditional scapegoats – developers, planners, valuers. And on property valuations it has this to say
“At its simplest level, an investment property valuation divides the rental income by the required yield to produce a value. Thus a rent of €30,000 at a yield of 7% produces a value of €428,571. In a boom economy, with readily
available finance, investor demand and anticipated rental growth, investors will accept lower yields, thus boosting property values. Property valuations are carried out at ‘a point in time’ and will use the average rents achievable for
properties of a similar type and location as the benchmark”
So taking that extract from the Fitzpatrick Tapes book “Economist Rossa White of Davy stockbrokers, Mark Fitzgerald of top estate agency Sherry Fitzgerald, and Pat Gunne of CBRE, the commercial property consultants,were invited into the bank to make presentations to directors and executives. These external advisers voiced the consensus view that there was no bubble and that Ireland`s property market was heading for a soft landing”
The “soft landing” view was the view that came from the top down in Irish society. If you read the Nyberg report you will be amazed that this view was regarded as the worst scenario but practically no-one was gainsaying it. So it doesn’t surprise me that members of the SCS will also have held that view. And you will probably find that many members of the SCS have property investments from the boom which are now suffering, showing that they believed the projections and that any slowing down would, at worst, be in the form of a soft landing.
And although most of Europe might have escaped our property crash, the UK had seen a 50% drop in commercial values since the peak in 2007 and despite the recovery in the past two years, prices are still on average 35% off-peak as measured by the IPD index. I think the jury is still out on Spain.
The Nyberg report – https://namawinelake.files.wordpress.com/2011/04/nybergreport.pdf
BTW, “Headline” rents oft quoted by agents to confuse the real rents are now obsolete as reviewed rental levels can no longer be calculated off them to achieve upward only rental levels – which was the only raison d’être for them in the first place.
The eurozone consists of 17 countries with a combined population of 330 million people. We all have the same currency,the same central bank the ECB .and the same interest rates.
Ireland was alone in the eurozone in having a commercial property crash. This was entiely a function of toxic Irish lease law i.e. 5 yearly upward only rent reviews tied to long leases say 25 years. In all other eurozone countries they have short leases say 3-10 years with break clauses and rents are reviewed annually by increases/decreases in rhe CPI.
It would have been impossible for Ireland to have had a commercial property bubble and bust if we had normal eurozone lease law. The Society of Chartered Surveyors the mouthpiece of the landlords and speculators ,lobbied our government to retain these toxic leases. The banks were not alone ,the surveyors played a central role in destroying the Irish economy.
John,
Your information is incorrect in your last post. We have
similar laws to the UK with regard to rent, leases and rent reviews.
@NAMAJew, I think John was careful to say EuroZone countries which of course excludes the UK.
@John “It would have been impossible for Ireland to have had a commercial property bubble and bust if we had normal eurozone lease law.” Normal EZ lease law might have allowed more flexibility with rent levels and lease terms but there was an overheated economy and property sector. The evidence seems to be that the residential property bubble was every bit as bad as commercial property.
But it seems very unfair indeed to blame lease law for the abundance of credit, the extranormal GDP growth and the construction boom.
Ireland is a member country of the eurozone. We are not a member of the sterling zone.
@John corcoran. Most of you statement above is erroneous. Upward only leases had little or nothing to do with causing the overheated property market. They were not the cause – they were the result.
For the past 50 years rental levels have been BELOW the market level for 80% of the time. It is only in the last 3 years that some (the legacy leases) are above it. I didn’t hear the landlords whinging for the last 50 years.
If you have a carbuncle on your leg, you don’t cut the leg off at the knee. You lance the carbuncle. There are simpler ways of solving the problems of local leaseholders than retrospectively changing the law of contract.
The investment world has pulled back from Ireland because of the uncertainty caused by the political promises prior to the election.
Extract The Fitzpatrick Tapes by Tom Lyons and Brian Carey
Page 123 last chapter
“Our exposure is not to the to the building,its to the money that comes from the leasing of it “he said “If the value of the property goes down ,it dosn`t matter. we still get our loan repaid“ Fitzpatrick was nothing if not consistent in this ,one of his core philosphies
Irish toxic leases were not available in any other eurozone country. No other eurozone country has had a commercial property crash–why. Because with eurozone lease law its virtually impossible to have a crash because tenants can walk after 3/5 years max. In ireland tenants can walk after 25 years.
No matter how stupid or reckless Fitzpatrick was he wouldn`t have lent tens of billions against eurozone leases. He lent BILLIONS against the leases not against the properties.
Toxic Irish lease law destroyed all our futures. It was championed and lobbied for by the Society of Chartered Surveyors. These people destroyed our economy.
@John Corcoran,
Most leases we have with tenants have five year break clauses so the tenant can leave after a short period of time or they can agree a new rent level with their landlord. It sounds to me like you work for REI or you are a tenant in a shop or office property. Please explain why Irish lease law
has destroyed all out futures expecially since the Government is about to introduce retrospective rent review legislation?
@John corcoran.
Yes, Fitzpatrick was consistent in that statement and the point he was making was that the bank did not have as big a pure property development exposure as people suggested.
A large part of its exposure was to the tenant. Therefore the exposure was not to the building, it was to the financial quality of the tenant and the length of the lease.
He regarded such lending more as the purchase of a bond from the tenant with the added recourse to the building at the end of the lease.
All investors (pension funds, insurance funds, investment managers etc) decide how much they will pay for an investment based on the quality of the tenant, the length of the lease and the location and condition of the property.
The problem is that there is recourse to personal guarantees. That should not be available. There should be another method of securing payments of leases. We are unforgiving and personalise things too much as a nation.
Retrospectively changing a law, that will expire due to the effluxion of time in any event, does not instill confidence in us as a receptacle for inward investment.
Where is the “common good” in the Irish taxpayer subsidising multi national retailers at the expense of their pension pool and the loss of billions to the national balance sheet through the NAMA property holdings?
There needs to be a local solution that deals with essential local traders. In France the issue is solved through the planning process, whereby a special planning designation is given to shops that can only be used by local traders (bakers, grocers etc) serving the community. These shops have controlled rents. It is only one solution there are others that can be implemented without overturning our credibility as an investment destination – which is hanging by a thread at present.
But it could be solved in one swoop by declaring personal guarantees in relation to leases null, void and uncollectable.
Why was Ireland the only country of the eurozone to have a massive commercial property bubble and crash?.
The reason was TOXIC COMMERCIAL LEASE LAW.
Every eurozone country had the same currency,the same central bank,the same interest rate, the same lease law—EXCEPT IRELAND—we had entirely different lease law. There were two components to our lease law. Our lease lenghts were very long say 25 years and NO break clauses, rents were reviewed every five with upward only rent reviews.
All other eurozone countries had short leases say 3-10 years with break clauses and the rents reviewed annually by increases/decreases in the CPI.
We could never have had a massive commercial property bubble and bust if we had regular eurozone lease law.
John Corcoran
M.Sc. Economics London School of Economics and Political Science
@john corcoran
As I said before most of the commercial leases that we deal with in Dublin have five year break clauses. Presently with breaks coming up the rents are dropping by up to 50% or the tenant will leave. So you are not correct that there are No break clauses. Maybe you are not familar with the Dublin market as you are based in London.
@John,
If you are correct, why did it only happen now?
I only went to DCU, but I always thought that asset bubbles were caused by money supply/credit. The banks weren’t properly regulated, very liquid, and the commercial lenders were amateurs. Sean Fitz was a fool who didn’t know he was a fool.
Many retail shop leases in Ireland have 35 year and 25 year lease lengths and most definitely NO BREAK CLAUSES. I have lived in Dublin for the last 33 years.
@John
You have adopted a mantra which, IMO, you believe that if repeated often enough will lead to acceptance. It’s the equivalent of justification of an argument or opinion by the use of “it’s a well known fact”.
The problem you have is that your mantra is incorrect. Most leases including legacy “upward only” leases included break clauses. Most legacy leases are held by the State (who requested 25 year leases), the multinationals and corporate entities. Almost none of those involved personal guarantees. Very few of these are complaining about rental levels and those that are are negotiating on the basis of a reduction in the rental level in exchange for an extension of the lease term, generally by five years.
Those leases that involve personal guarantees relate to leaseholders who are weak financially.
Their options are to:
(a) negotiate as above.
(b) walk away from the lease, hand back the keys and if they wish open up down the road wearing a different “skin”.
The latter (b) is like playing Russian roulette with the landlord. But in the end it is not easy for the landlord.
He has the option of pursuing a judgment, which as the banks will tell you is just as useful as wallpaper.
Pushing the tenant into bankruptcy will cost the landlord all the legal, accountancy and court expenses for the next 12 years. That’s why nobody does it.
What will happen is that at worst the tenant will be able to negotiate a settlement for walking away from the lease obligation.
I don’t know what they teach you at the LSE, but obviously it isn’t the real-politic of the property marketplace.
@Frank
These toxic leases were an unexploded bomb ready to be detonated under boom conditions. The insatiable greed of the landlords drove rents in Dublin so high that in 2008 Grafton Street became the fifth highest rented street in the world. At rent reviews the highest rent paid by any fool was evidence used against all tenants in a street or shopping centre. There was a massive incentive for bias/corruption of the rent review/arbitration system.
Retail shops yields fell as low as 2% when long term yields should have been 6%. The toxic lease law was a twin headed monster–it destroyed the tenants by massive overrenting and it was the rocket fuel for the valuation model which created the massive commercial property bubble. When this bubble burst it destroyed our banks and the country.
The Society of Chartered Surveyors were the mouthpiece for the landlords/speculators and their valuations were the greatest work of fiction in world property history. The banks lent tens of billions against these nonsense valuations. They lobbied the government to retain these toxic /lethal leases.
The surveyors played a central role in the destruction of our country. Toxic Irish commercial lease law destroyed our economy.
@John,
The banks destroyed themselves. The government destroyed the country. By creating NAMA the government, unwittingly I presume, made the taxpayer the ‘bagholder.’ When the market ran out of ‘greater fools,’ the banks, their investors, and their bondholders, should have been the ‘bagholders.’ That’s capitalism.
@John,
Forgot to add this link:
Sometimes a picture is worth a thousand words.
As an example and evidence of my posting above, I would refer to 4Home who walked away from their leases in several retail parks in Ireland, despite having guarantees from their parent company Reox Holdings and in some cases DairyGold.
@John corcoran.
The market corrects itself. Stop whinging about it John, call the bluff and move on. Give the keys back and open up at a lower rent down the street in a Newco. If you can’t get a satisfactory competitive lease down the street, move to a different location.
In spite of what you may or may not think, we all have choices – including you.
WSTT is correct. Walkaway from the shop. Life it too short.
Play the ball–not the man. Concentrate on the issue–not on the person.
Please try to answer the question. Why was Ireland alone in the eurozone to have had a massive commercial property crash?
John, we own a shopping centre in Dublin with twenty-five year and thirty-five years leases. Some leases have breaks and some leases don’t. When the downturn happened in 2008/2009 we reduced the rent by 20% before even one tenant asked. In the last twelve months we reduced the rent a further 20%. Out of about thirty tenants only one has had to close their shop. We had pg’s on the lease and do not intend to chase the tenant. Total waste of time and effort. This is the way to deal with what has happened. Common sense and fairness. It is our interest that the tenants survive. The terms of their lease have become irrlevant in the current climate. Landlords (and their banks) need to have sense. As to your question,
Spain has had a similar if not worse crash than Ireland and the form of lease had nothing to do with the crash. I think the problem was ease of credit from banks and not the terms of the lease.
John, to follow on from the last comment, the formation of Nama and its operation for the last two years have really destroyed this country. The brief was to protect asset values and in the last two years values have been dropping much faster than in 2008/9, the start of the crash.
Nama should have been a place where all the fields with planning permission should have been left. The good quality assets should have been left in the banks and managed by the banks. This would have avoided the meltdown and the destruction of the banks capital base.
Recently I know of a non Nama bank which is now taking equity in a development and keeping its interest margin low on the property. Thus allowing more capital to be repaid back on the loan. The bank becomes your partner and you work together.
Nama’s obsession with a pound of flesh, and now appointing Receivers to everything, will reduce the values and proceeds of the assets even further. Properties will now need to be sold for even less than Nama paid for the asset. Where is Peter Bacon just when we need him !!
@John corcoran:
I am playing the ball. If someone is unhappy with their lease they should threaten to walk away from it. And as with any threat, they should be prepared to follow through.
“Why was Ireland alone in the eurozone to have had a massive commercial property crash?”
They didn’t just have a commercial property crash, they had a residential one too and the reasons are well stated in the Nyberg report.
To answer your question, essentially it was just too much cheap money, encouraging too many people to buy too few assets. As a graduate of the LSE, you will recognise the principal of “supply and demand” at work.
Lately, Joan Burton said it was because of the ECB and the low interest rates it presided over during the boom, which enabled Irish banks to get huge amounts of money cheaply to lend. The minister likened the ECB to a “briber” in Ireland’s boom years, when she said: “Just as the person who takes a bribe is responsible for taking a bribe, the briber also has a responsibility.”
In summary, it was because we had a massive credit bubble… and everyone wanted to be a property developer. That’s why.
If your lease is for 25 years, no break clauses, upward only reviews every 5 years and, as a condition added to the lease, were required to sign personal guarantees because you “…had no ‘covenant’…” then you cannot walk away or default. Or if you do you lose your business and have your debt attached to your home.
These leases are a life sentence – and since the new law came into force last year, these leases are untransferable. Who would take over this lease when you can get a new one without the noose? The landlord has all the cards – in an economic maelstrom like the one we are in now holders of these leases are doomed. Let’s not kid ourselves that landlords are being benevolent – if you get a € of a reduction you pay for it with the total loss of privacy and unreasonable demands.
Welcome to the world of the independent, Irish retailer.
@PGD
Why do you feel that it is equitable that the retailer who entered into such an agreement should transfer his loss to the landlord who, in all likelihood, has a corresponding liability to pay interest on his loan to NAMA?
He too will undoubtedly have personal guarantees and the consequence of such non payment is that he will have the debts attached to his home rather than the tenant’s. Is this a game of “pass the parcel”? Or just pass your liability to someone else whatever the morality of that may be.
The fact is that you will find the local independent landlords much more flexible than than the institutions or pension funds and they are the ones that can least afford it.
Any tenants that by now haven’t learned from the developers how to protect their family assets including their home must be living in a parallel universe – or need their heads examined.
Rents are set by the same laws of supply and demand as anything else. If you consider you are paying too much, plan your affairs and protect your assets legally. Agree a new lease on favourable terms and at market rent from one of the many empty stores that line our retail streets and move – or at least threaten it. If you don’t get a satisfactory response, then DO IT.
Your landlord will find that it is not easy to obtain judgements or to take your assets if you are prepared, have planned and defend yourself properly.
Going around giving personal guarantees in a promiscuous fashion and holding the family assets at the same time is like having unprotected sex – unwise.
Wstt – the problem is that our rent is not set by laws of supply and demand.
In the late 1990’s, before the boom was underway, the escalation of property values and rents was as unforeseeable as the current collapse has been.
We have suffered a catastrophic collapse of income. We have obligations that are increasingly difficult to meet. I can’t understand why my landlord’s income must be protected but not mine.
We are squeezed by both a drop in income and the demands of a landlord with “…an iron clad contract…”. There is no way out.
Extract “Breakfast with Anglo“ by Simon Kelly
Page 47
“Banks believe valuers,which always amazes me because valuers don`t buy buildings. Some time ago ,a system evolved whereby a valuer`s word was absolute, and a valuation was almost as good as money in the bank“
Extract The Fitzpatrick Tapes
Page 243 2nd Chapter
“`McNamara arranged financing from Anglo and AIB. Anglo took the lead,getting a draft valuation from CBRE in November 2006 that confirmed that 412 million valuation McNamara had come up with. (In January 2008 CBRE did a formal valuation that put the site at the same figure,even though by then property prices were clearly falling)“
Page 244 2nd Chapter
“ Fitzpatrick says he was stunned by the collapse in the value of the site, which had been taken over by Nama for 60 million, or just over one seventh of the purchase price“
In order to get funding from the banks you needed surveyors valuations. The banks lent tens of billions against these surveyors valuations. Because of the toxic lease law they lent 90% LTV ratios.
The combination of toxic Irish commercial lease law and these absurd valuations destroyed our entire economy.
It wasn`t just the banks the surveyors played a central role in the destruction of the economy .
@John. No. What destroyed our economy was government reliance on once off capital taxes such as stamp duty, the escalation in civil service pay and the guarantee given to the bondholders in September 2008.
The economy was destroyed by the greatest property crash in the history of mankind. The property experts were the surveyors not the bankers. The banks lent tens of billions against these nonsense surveyors valuations. The commercial property valuations were a function of toxic Irish commercial lease law.
Therefore toxic Irish commercial lease law destroyed the economy.
Why did no other eurozone country have a MASSIVE COMMERCIAL PROPERTY CRASH ?
@PGD, There is always a way out. Sometimes it is not an easy way and not a way of choice, but there is always a way. The problem in Ireland is that we do not forgive failure or offer a second chance. However, you have to ignore that and do whatever is necessary. 4Home did, Reox did and so did others.
What is the point of landlords chasing personal guarantees of tenants that can’t pay? It is an impotent exercise.
BTW, the landlord’s income isn’t protected. It’s as good as the quality of the tenant – that’s all. If the tenant wants out, he needs to make himself of very limited quality. The landlord is then faced with letting the empty shop at a market value. Thoughts of “The Field” come into play at that point!
@John. The economy wasn’t destroyed by the property crash. It was destroyed by a credit bubble, fiscal mismanagement and an incompetent government making bad decisions.
I absolutely agree with you though that the surveyors led the cheerleading and produced negligent and nonsensical valuations. These genii now mostly work for NAMA. God help us.
@John
“Why did no other eurozone country have a MASSIVE COMMERCIAL PROPERTY CRASH ?”
Because they didn’t have the credit and consequent property bubble.
Wstt – thank you for your comments. Genuinely helpful and insightful. May finally sleep tonight…
Off topic but:
A very Happy Easter to everyone posting here and especially NWL for providing the best analysis of NAMA information anywhere and for affording us all the opportunity to exchange views.
I hope that the period ahead will produce hope for us all. Landlord, tenant, developer, investor and citizen alike.
+100
@PGD, There are certain things that you don’t learn at the LSE about managing a situation like this. You may consider some to be a little excessive – but if you want the strategy to be effective ……
To put yourself in a good negotiating position choose from the menu:
1) Divorce the wife and give her the house and family assets in settlement. Living in sin for a couple of years adds a bit of spice to the relationship anyway ;-). If you don’t want to do that sell or gift your share to her (take legal advice) However, my preference is for the nuclear option.
2. Move cash out of the bank account on a daily basis in smallish lots over a period of months. Do not write cheques or take drafts that leave a paper trail. Lodge it in different accounts in different names in cash, or collect it and lodge it out of the country, but not to yourself.
3. Launder the cars and any art through an auction. Buy it back through a friend or a corporate if you want.
Having divested yourself of your personal assets, you are now in a position to negotiate your lease reduction with your landlord. You will find him a lot more accommodating. He’s got a choice between you at a market rent or an empty shop.
If he tries to rent it on the open market at present he will have to concede five year breaks, a rent free period of c. 20% and a fit out allowance. That’s if he can rent it at all
;-)
The haste with which the notion of interfering with private employment contracts was abandoned – with the aim of reducing top public-sector salaries to €250,000 (or €200,000 as in the Fine Gael manifesto) – mightn’t augur well for the Minister’s commitment to abolish Upward Only Rent Review lease terms. Which might mean we get the worst of all outcomes by having a long-drawn out cogitation period, which might lead to legislation which will probably lead to legal challenges by (dis)affected landlords. And all the while, domestic and international investors will keep their wallets closed or bid for properties at a level which assumes the abolition attempt by the Minister will be successful. And retailers, and other commercial tenants, may in the meantime succumb to the recession and go out of business. Governments might get some credit for trying to do what they feel to be right but if the end result is as described above, then this Government is unlikely to get credit from any quarter.
Now we don’t do subornation on here, so any suggestion here or in any other comments should only be taken in a hypothetical context. Here are the three main landlord/tenant/UORR scenarios as I understand it. I have generated illustrative numbers and details to help understanding.
(1) Independent retailer A has a 25 year lease from Landlord A, commenced in 2000 and expires in 2025. The lease doesn’t have any break clause and is an Upward Only Rent Review lease with reviews every 5 years. The rent in 2000 was €100 psf, in 2005 it was raised to €250 psf and in 2010 it was kept at €250 psf. The market rent today is €100 psf. A personal guarantee was required when the lease was signed. The retailer personally owns a house with their partner which has €100,000 equity in it and they own personal assets which include cash, a car, furniture and personal effects. The landlord is a 65-year old widow. The property is worth €1m today and there is a €0.75m loan on the property. If the rent is reduced to €100 psf, the landlord will not be able to afford to service the interest payments.
(2) Same as (1) above except Independent Retailer B has a landlord which is a pension fund. And as we know, some 3% of the funds under management by Irish pension funds are invested in commercial property. So in this scenario, the landlord doesn’t have any loans securing the commercial property but if the rent from the tenant reduces, the pension fund will make less profit and will consequently have less available to pay pensioners.
(3) Here the retailer tenant is a multinational company (MNC) who sells into the Irish market. This MNC can certainly afford to pay the existing rent. However the MNC justifies the high prices it charges Irish consumers by claiming its prices must reflect its costs and those costs include rent.
There may be wealth protection tactics that may be open to Retailer A & B. However, the retailer might expose themselves to recovery action and might additionally stand accused of deliberately reducing their wealth to bilk creditors. As Frank Daly, the NAMA chairman might remind us, in addition to the NAMA Act there is the Conveyancing Act (Ireland) 1634 (plus amendments) and the Land and Conveyancing Act 2009 which allow creditors to seek to undo transactions which might have been intended to bilk them out of benefits. So spousal transfers and other measures borrowed from the Black Arts might be adopted by the retailer but they still leave themselves exposed to legal sanction. And this ignores any moral consideration. Of course in a practical sense, the landlord might not want to risk a costly legal action with an uncertain result. On the other hand, an institutional landlord might pursue a tenant to the ends of the earth to make an example of them.
There is a problem I do have with the proposal to abolish UORRs and that is that it may not lead to any reduction in prices being passed on to consumers because commercial tenants might simply continue to defend their high prices by reference to the fact they must still pay business rates/local authority charges and what are considered to be high gas and electricity charges (high by reference to our EU neighbours) and high labour costs (the €8.65 per hour minimum wage is being restored and there is still no practical movement on changing wage agreements). The two state-funded bodies, the National Consumer Agency and the Competition Authority have hardly had glittering careers in promoting a competitive economy, particularly since the financial crisis in 2008.
The following might be helpful to some people following the debate.
Independent Retailer – essentially not part of a chain. If you have only one shop, then you’re an independent retailer. If you have more than one shop then the lines between independent retailer and chain get blurred. Donnybrook Fair is an independent retailer. Tesco is a chain.
Personal Guarantee – a legal agreement entered into by the commercial tenant (which is often a business or a limited company) committing the individual to making up any shortfall in the financial commitment of the business. For example, if the business fails to make a rent payment to the landlord under the lease agreement, the landlord can seek the payment from the tenant as an individual. So the tenant’s house or other personal assets could potentially be seized to make up any financial shortfall on the part of the business.
Upward Only Rent Review leases – commercial lease agreements which will typically allow a review of rents every five years but the new rent cannot be set lower than the previous rent, even if the open-market rent has decreased.
Pre-emptive actions to protect family assets should be taken as a matter of course by anyone giving personal guarantees.
It really has nothing to do with bilking creditors; it has more to do with protection.
If you decide that you are going to visit with the ladies of the night in downtown Lagos, the least you can do for the wife at home (if you have one) and for yourself, is to wear a condom.
@WSTT, that’s a colourful methaphor but I wonder how many one-off outlets would regard leases/personal guarantees in that way – some commercial tenants might be considered naive in not taking concrete steps to protect their personal wealth but maybe they think that playing by the book is the right way to behave. Divorce, inconspicuous withdrawls from the business and disposing of personal assets takes time also and for a retailer facing ruin in April, 2011 those steps might be too late. And with respect to pre-emptive actions, I’m not sure the learn’d men and women down by the Quays would see it that way and might decide there was more than a little pre-meditation involved.
Though as you say, in practice most landlords won’t want the hassle of pursuing a personal guarantee, but it’s still requires quite a leap of faith for a independent retailer.
IMO, and leaving aside any bias for the moment, I would have thought that the proposed legislation is clearly unconstitutional in that it clearly represents an unwarranted interference with property rights, which are guaranteed by the Constitution, and one would also have to say that it unfairly discriminates against one group in favour of another group, i.e. landlords are being discriminated against in favour of tenants.
Under the law, a Lease is a contract freely entered into between parties and it is an very dangerous precedent to use what is (hopefully) a relatively temporary economic crisis to form a justification of what would be an unprecedented interference with the right of individuals to enter into binding contractual relationships.
There are also issues of European Law and whether or not the proposed legislation would be contrary to the provisions of the European Convention.
And NWL is correct, it is inevitable that any attempt to introduce such legislation will be challenged in Court.
I honestly believe that if the last government could have done this, they would have. This one made pre-election political promises on a populist basis without knowing what they were talking about or thinking it through.
That’s why we need the Black Arts (I like that description NWL) ;-)
@NWL, I think that the emphasis is on precaution rather than premeditation. And the learned folks in the Four Courts are not really that bright…. they seem to disagree on most things!
When divorce was introduced in Ireland it affected previous marriage contracts. Many changes to landlord and tenant law is retrospective. In 2009 the high court upheld the state`s tearing up contracts with the pharmacists with the judge stating “There is an exceptional threat to the economic wellbeing of the state and its people“
Minister Shatter has affirmed on live television that under article 43.2.1 and article 43.2.2 “property rights can be overruled in the interests of the common good and on the principles of social justice“ He went on to say the current economic situation is a nationaL emergency and the retention of jobs is vital.
Ireland has the most anti-tenant lease law in europe and the highest rents per capita in the world. Our government can no longer stand idly by and witness the slaughter of sustainable Irish retail businesses and jobs using toxic lease law that landlords would be jailed in any other eurozone country if they attempted it their.
This toxic lease law championed by the Society of Chartered Surveyors was the rocket fuel for the commercial property asset pricing which created the monster commercial property bubble. This lease law just didn`t destroy the retailers it destroyed the country.
@John: I am not aware that the SCS championed the lease laws. They have been in existence for over a century and are a legacy from the time our rulers lived in the UK rather than Germany and the USA.
Valuations are supposed to report lease and capital levels at any point in time rather than set them.
IMO, changing the legislation will be a transfer of wealth from the Irish taxpayer to multinational occupiers. It is not about property developers and investors – it is about taxpayers and pension schemes which have invested in property. No independent analysis has been carried out on the effect of the proposed legislation. The reaction from overseas is that we are a “banana republic” and whilst I accept that local traders should be helped – this is not the way to do it.
Government interference in landlord – tenant arrangements was disastrous in the 1970s when the UK government introduced a rent freeze which led directly to the secondary banking crisis and almost took down the whole UK financial system.
Many landlords have dropped rents, but this blanket retrospective law will lead to legal challenges that will cause more uncertainty and have a further negative impact on overseas investor sentiment.
The rental market will be dominated by NAMA for the next decade and it represents the taxpayer – so where is the “common good” when all the losses fall on it?
@Wstt – won’t be taking nuclear option, thanks all the same.
I can’t see how removing the UORR clause affects property rights. Landlords will still own and benefit in every way from their assets, except they will have to take a market rent. If NAMA becomes the landlord and it’s success is predicated on maintaining inflated rents and the notional “asset values” that these rents offer, then it’s just a whole lot more heads in the sand stuff.
As for the old lady pensioner who is a property owner depending on the rent for her income/ repayments, why is her investment so much more sacrosanct than pensioners who bought residential property for the same reason? They are almost certainly getting less rent than before. Or little old ladies and gents who have/ had bank shares?
Everyone has to take pain now to allow some form of survival for all. I have a lot of respect for landlords who have met their tenants half way.
But the guys who are clutching their leases and personal guarantees and issuing threats and menaces to tenants who are good business people? I hope they get everything Minister Shatter can possibly throw at them.
@PGD, do you know if there are any statistics available on the number of UORR leases presently in existence? The impression sometimes given by those who want to preserve UORRs is that it is only a tiny fraction of commercial tenants presently suffering from UORRs. I have looked at the Retail Excellence Ireland presentations but am unable to find any hard data on how widespread UORR leases are today.
There is an expression coined from an 1842 English legal case that “hard cases make bad law”. Now hard cases might be retailers struggling to remain open under the burden of peak rents. Could also be pensioners who own one commercial property and were relying on income from it to allow them to live with dignity in old age.
@nwl – no, not sure of numbers. Not sure who would have that level of detail. UORR were only made illegal 14mts ago. This clause was “industry standard” or so we were told in the late 90’s so I expect a lot of legacy leases are UORR – except for perhaps larger chains with negotiating power.
Hard cases do make bad law – agreed. No need to penalise everybody because of the few. But is it few?
Almost all commercial leases now in existence have the notorious UORR clause. First principle —commercial property is a service to enterprise,trade and employment –with toxic Irish lease law they destroy all three.
The Irish Constitution
Private property Article 43
article 43.2.1–The State recognises,however, that the exercise that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice.
How can it be socially just that tenants are being forced to pay three/four /ten times the market rent because of an arbitration decision which the tenant is a victim of.
Why is toxic Irish lease law not allowed in any third world country or any other eurozone country.?
@John; Could you please give specific examples of where tenants are forced to pay rents that are 10 times the market level?
I am not aware that Irish lease law is banned in third world countries or other eurozone countries. Could you quote details demonstrating where this is disallowed? I am aware that there are different lease terms available in the eurozone, but not that particular terms are disallowed.
“Almost all commercial leases now in existence have the notorious UORR clause” Do they? Can you be specific? Or is that just a “throw away” sound bite? Because I do not believe that it is correct.
As I said in my previous post, no independent analysis has been carried out in relation to the proposed legislation. And that is a mistake. Introducing legislation without knowing what its effect will be is like playing Russian roulette with a loaded gun and it just shows the stupidity of our politicians making pre-election promises without having any idea of their consequences.
There are better solutions than this proposed legislation.
For those Irish tenants who are massively overrented ,and paying a multiple of market rents,and been bled dry by greedy and ruthless landlords ;
-the work goes on
-the cause endures
-the hope still lives
-and the dream of real market rents will never die.
Who are the greediest landlords in the world and why are they against market rents?. How many Irish businesses and jobs have they destroyed?
This toxic lease law just didn`t destroy the retailers,their businesses and jobs –it destroyed the country. If Ireland had normal eurozone lease law it would have been impossible to have had a commercial property bubble and crash.
@John, it seems obvious that some Irish commercial tenants are suffering with UORRs. But to move the debate on, do you have specific information such as that mentioned by WSTT below? It might be that a lot of information just isn’t available. For example, UORR leases were banned from Feb 2010 and anecdotally some landlords have agreed to rent reductions on old UORR leases since then but we seem to be in the dark as regards real information, how many UORRs were unilaterally altered by landlords and if the old rent was €1,000 psf and the market rent is €500 psf, is the new rent €990 or €510? We seem to be lacking information.
I cannot comprehend your questions ? Take retail commercial leases ,which I am most familiar with, –they were either 35 years or 25 year lease lenghts, therefore most tenants have on average have say 15 years to go. Remember the ban is only one year old and there have been very few new transactions because of the economic collapse and the total lack of confidence.
Examples of where some tenants are paying ten times or more is evident all over Ireland in every town . Some retailers in these towns are paying say 50,000 per annum and many other shops on the same street are boarded up.
Commercial property is a service to enterprise ,trade and employment –it was never meant to destroy them. Please try to up the quality of your arguments against tenants been allowed market rents. Not all landlords are in Nama.
@John, the reason I think there has been a more fundamental decline in commercial rents than you suggest is because the two commercial indices in the State, the Jones Lang LaSalle index and the Society of Chartered Surveyors/Investment Property Databank show rents are down some 50% from peak for the portfolio of properties that comprise their indices and rents have been dropping by 20%+ annualised in each of the last four quarterly publications. If only a small proportion of commercial leases were signed after February 2010 then that seems to mean that landlords have been agreeing to unilateral reductions on older UORR leases.
When you say that some tenants are paying 10x market rents then that is puzzling. I personally would have expected the worst case to have been about 4x (the average decline in rent suggests that on average UORR commercial tenants are paying 2x) market rents. Do you have any examples of tenants paying 10 x the market rent? Not sure which questions you don’t find comprehensible but that question seems straightforward and is aimed at understanding how bad the situation is for commercial tenants, and it would move the debate along to have that sort of detail. Otherwise we get stuck in the pantomime of rapacious landlords and innocent tenants. And given that property companies/landlords will have more data available than single independent retailers, it would be helpful for that side of the argument to make its information available also.
Reading the editorial piece in today’s Irish Times, it seems that the legislation governing all aspects of landlord/tenant relationship – commercial & residential – is up for amendment.. But specifically, the UORR clause will be dealt with separately and soon (if we can believe anything in the paper these days)…
Nwl – looks like your much commented upon thread is indeed a hot topic…
@PGD, thank you for drawing attention to this. The Department of Justice and Equality (“Law Reform” seems to have disappeared from the title, another change of stationery and signs??) has commenced a consultation process for reforms to both residential and commercial rental arrangements. The link to the press release from the ministry is shown below which also contains links to the draft Bill and explanatory notes. With respect to UORRs, the statement from the ministry states ” a modern landlord and tenant code applicable to business tenancies is essential for our economic recovery and while attention has, quite understandably, been focussed in recent times on problems associated with ‘upward only’ rent reviews, the entire landlord and tenant code needs to be updated to make it ‘fit for purpose’ in the 21st century” and ” As regards ‘upward only’ rent reviews, the Minister said that in light of the difficult economic circumstances which continued to prevail, consultations were ongoing with the Attorney General in order that this matter be progressed as expeditiously as possible. The addressing of this issue is being dealt with separately and will not be delayed by the consultative process commenced today.” The press statement is dated 18th April, 2011.
http://www.justice.ie/en/JELR/Pages/PR11000046
In 2008 Grafton Street became the fifth highest rented street in the WORLD. In 2008 Ireland was bankrupt,we had a populatioon of 4.5 million ,similar in size to the Greater Manchester Area. Grafton Street freeholds were at 2% yields. How much more evidence to you need of the madness that was going on. Please speed up to reality. Toxic Irish commercial lease law desroyed the country. How could we have had a commercial property bubble and bust if we had normal eurozone lease law?
Please deal with this question and stop diverting to nonsense arguments and stats.
John Corcoran
M.Sc Economics
London School of Economics and Political Science
@John corcoran. While soundbites and vague, but inaccurate, statements make great headlines they are not facts. And when such statements are examined they need to stand up to scrutiny – otherwise you do your argument and the result that you will obtain from it, an injustice.
This can be seen most recently in the case of the Lighthouse Cinema which proclaimed to the media that: “The landlord doubled the rent!”. The media, never letting the facts get in the way of a good soundbite, repeated the allegation and ignored the facts (or didn’t bother to check them). In the only forum that mattered, the High Court, the facts won and the Lighthouse lost.
The point is John that you will not win your argument on “soundbites”. You need to back it up with facts not “spin”.
BTW, John. Yields relate to the capital value of the asset. They are not a measure of the rent paid. All a 2% yield shows is that somebody paid too much for the building.
“How could we have had a commercial property bubble and bust if we had normal eurozone lease law?
Please deal with this question….”
Property bubbles almost always start because fundamentals such as population growth, interest rates and economic expansion are benign. A shrinking population weighs on Germany’s housing market, for example, and a rising one underpins long-term confidence in China’s.
These fundamentals explain why many market participants are able to persuade themselves that huge price rises are justified and sustainable. Chastened regulators now talk about a presumption of guilt, not innocence, when prices look frothy. That is because property markets are inefficient in several ways which make it more likely that they will overshoot.
Another reason for momentum in property markets is the fact that there are no short-sellers. If you think property is overpriced, it is difficult to profit from that view. As a report from Georgetown University Law Centre and the University of Pennsylvania pointed out on the causes of the property bubble in America, it is impossible to borrow the Empire State Building in order to sell New York real estate short.
HSBC probably came closest by selling its Canary Wharf tower in London for £1.1 billion in 2007 and buying it back from its debt-laden owners for £250m less in late 2008—the greatest short sale in the history of property, I would think.
To get back to your question, the commercial property boom was fueled by easy money and loose underwriting standards by the banks – not by the leases that were written. It would not have mattered what level the leases were at, some idiot would still pay a 2% yield for them. And don’t forget leases have been BELOW the market level for 80% of the time over the past 60 years. It is only in the last 3 years that they have been above it.
Please please address my central thesis–how would it have been possible for Ireland to have a commercial property bubble and bust if we had normal eurozone lease law?. Try to address this issue and not divert to lighthouses etc etc etc. Please address this simple question.
@John, the attached CBRE report might be helpful as it shows commercial rents in the EU and selected other countries, the decline in rent from peak and the change in yield (rent divided by capital values). I think you are right to say that retail capital prices have dropped more in Ireland than other EU countries though Spain and Greece appear to have had 40% & 54% declines if I am calculating the declines in capital value correctly. So although we might be no 1 for the collapse in capital values others are in the same ballpark.
http://www.cbre.eu/portal/pls/portal/CBWEB.utils_news_public.show_image?id=6087&field=doc1&trans=n
Because it has little to do with lease law and much more to do with easy money supply and demand for property assets by investors. Residential lease laws had little impact on the capital value that people were prepared to pay for houses – it had everything to do with the availability of credit.
For example, if rental levels rose when demand for retail space increased (due to supply and demand), investors would have paid a multiple of those rents (even down to a 2% yield) because of easy money from the banks. If the banks were not lending in such a reckless manner, as is the present situation, then there would have been no bubble.
When market rents came down and bank funding was unavailable, there would have been a fall in values and a consequent collapse of the commercial property market – irrespective of lease laws.
To say that the commercial property market has not fallen in all eurozone countries is not correct. There have been falls in Spain, Portugal, Greece, Italy and some of the East European block including Poland.
To back up my statements about the eurozone declines:
Central and Eastern European markets – comprised of Czech Republic, Poland, Hungary and Slovakia, as well as a composite return for the rest of CEE – have all delivered three consecutive years of capital depreciation from 2008, losing a cumulative 20.5% from property values. (Source IPC)
They did not have banks providing credit to the tune of four times the size of the economy to their markets – but they still had a commercial property decline.
@WSTT, I think John was trying to limit his comments to the EZ and of course only Slovakia is an EZ country from that list and even then only since 2009. Perhaps John can explain though why he restricts his analysis to EZ countries – I will check but my experience of commercial leases in Hungary and Poland is that they are not dissimilar to the EZ.
It is sad that you mention a CBRE report after the quotes from the Fitzpatrick Tapes pages 243 and 252. The absurd rents was merely the symptom the lease law was the disease.
Remember Sean Fitzpatrick`s core philosophy was and I quote page 123 “Our exposure is not to the property it`s to the money that comes from the leasing of it“he said. “If the value of the property goes down ,it dosn`t matter. We still get our loan repaid.“
He lent against these toxic leases not the property. He could not get these toxic leases in any other eurozone country or any third world country.
@John, I quote from the CBRE report because CBRE is a generally well-respected company and it has produced information for countries across Europe. Can you cite another source which contradicts the CBRE report and which shows that Greece and Spain have not suffered sharp falls in commercial property prices? If you can’t then how can you support your contention that only Ireland has suffered from a commercial property bubble?
Leases are akin to bonds in the eyes of the pension funds and banks and they do look to the quality of the leaseholder when they assess the value of the lease – or they should do so. Please give examples of where these “toxic” leases are banned. The generic is useless and is not informed.
The Fitzpatrick Tapes page 252 paragraph 3
“The bank did not exist inside a cocoon. It regularly sought outside views. Economist Rossa White of Davy stockbrokers, Mark Fitzgerald of top estate agency Sherry Fitzgerald, and Pat Gunne of CBRE, the commercial consultants,were invited into the bank to make presentations to directors and execctives. These external advisers voiced the consensus view that there was no bubble and that Ireland`s property market was headed for a soft landing.“
The property experts at CBRE were describing the greatest property bubble in the history of mankind which in turn created the greatest bank crash in world history.
Your four year old child could have figured it was a bubble. How sad you would quote CBRE as an expert. The horror story goes on–play it again Sam.
@John
(1) CBRE may not be able to predict the future but I think they’re quite competent in recording the past and their figures for Europe show other EuroZone countries have suffered severe declines in commercial property, though Ireland is still, as far as I can see No 1 for declines
(2) If you disregard CBRE where do you get information to support your contentions? Are you guessing or do you have a source?
Sean Fitzpatrick agreed with CBRE on their valuation of the glass bottle site, he also agreed with them on the soft landing etc etc . I have no doubt Nama is stuffed with CBRE valuations which now look sad.
Please remember you are dealing with the greatest property crash in the history of mankind which destroyed all Irish banks and the entire country. CBRE and their fellow travellors were the property experts—try to be proportinate–this has never happened in any other country EVER.
It happened in Japan:
http://www.pimco.com/EN/Insights/Pages/Japan%20Credit%20Perspectives%20Jan%202009%20Evolving%20Crisis.aspx
It happened in Iceland:
http://sic.althingi.is/
We’re only special in how the Irish establishment lashed the state to the stinking, sinking banks.
Northern Rock, which was doing the residential version of Anglo’s business model (source cheap funding via wholesale markets) went bang 12 months before Anglo.
Quinn’s, and many others, tax-free CFD plays were the perfect targets for the Hedge funds in London to squeeze the equity side of Anglo – based on knowledge of how broken their funding model was.
The Central Bank and the Financial Regulator were well aware that Anglo was in the firing line. They called for green jerseys and golden circles and bet the farm on “bed and breakfast” arrangements and banning short sellers. Anglo had long departed from building a lending business based on commercial leases.
The scam was loaning against the life of the asset and bringing the profits from the leases forward and booking them presently to get the bonuses.
Sean FitzPatrick’s mad ramblings on the soundness of the commercial lease business model ignores where they were really getting their funding from.
In true Bernie Madoff fashion, they’d simply run out of suckers – until Brian Cowen and Brian Lenihan stepped in.
The valuers were right until they were wrong – but it was the banks that made them right, and it was the banks who made them wrong – and it was the politicians who made the mistakes of the few the price to be paid by the many.
The music has played before and when it stops people go to jail. Judging by the speed of convictions to date, I wouldn’t hold your breath on getting the valuers in the dock some time this century.
Why does no other eurozone country or no third world country use our lease law?
@John, who cares why no other eurozone country or third world country use our lease law ? Its an irrelevant point, our economic woes are not due to one little clause in commercial lease agreements. It is clear you will find it difficult to get over this issue.
Even if upward only rent reviews were never allowed in Irish leases, there would still be plenty of tenants in over-rented properties even now, so we would find ourselves in the same situation.
In any case, no landlord with worth his salt is going to allow a tenant to go bankrupt so he can end up with an empty premises and pay rates, s.c etc. He will then have to attract a tenant with incentives and still only achieve a market rent. The landlord will simply negotiate when they have to. ie when the retailer will not survive.
Retailers seem to believe that they have a right to demand landlords to give them rent reductions and tear up contracts they entered into under their own free will. I wonder how the landlords banks would feel if landlords demanded the same sort of treatment from them? It is a vicious circle. If anything the retailers should be putting pressure on the same banks to encourage debt forgiveness and thus allow landlords to reduce rent for their tenants – many landlords have their hands tied !
John you must work for NAMA the amount of distraction you have caused the posters on this website or else Penguin Ireland (publisher of The Fitzpatrick Tapes) but I take your point.
I am sure even if we had proper oversight of the banks, monetary independence, a counter-cyclical fiscal policy over the last three parliaments and no personal and mortgage credit bubble and NO NATIONALISATION OF PRIVATE OBLIGATIONS we would still be going cap in hand to the IMF becuase of UORR.
Yes if only we got rid of UORR we’d be known as the Singapore of Europe right now. Damn Landlords!!!
Sean Fitzpatrick`s core philosophy was “Our exposure is not to the building,it`s to the money that comes from the leasing of it.“ He said “If the value of the property goes down,it dosn`t matter. We still get our loan repaid“
Fitzpatrick could not get these long leases tied to upward only rents in any other eurozone country and most certainly not in any third world country. He lent TENS OF BILLIONS against these toxic leases ,not against the properties.
Toxic Irish commercial lease law was the rocket fuel for the valuation model which created the massive commercial property bubble.
Sean FitzPatrick lied.
That wasn’t their business model.
You would be much better served seeing what Seannie had to say about selling their Austrian private banking subsidiary – I guess he ain’t going into too much detail on that:
http://www.thepost.ie/story/text/ojkfojidoj/
To be honest, if you tried to get €100,000 to invest in a bright idea – no guarantees, a buy-to-let – no guarantees, or a commercial property – income guaranteed to go upwards only for 25years , who would be most likely to get the funding?
@PGD, given that (Loan to Value, the % of the value of a property that lenders would advance to borrowers) LTVs on residential mortgages rose to 100% during the boom whilst LTVs for commercial generally stayed at the 70-80% mark, I’d have to say that banks saw residential as a safer bet than commercial, regardless of lease type.
John in the us appraisers don’t get paid that much
Their job is not to f.. the deal which is the price agreed by seller buyer bankers etc.
Never worked in Ireland but did a few RE deals in us we never ever waited for the ‘valuation’ or appraisal the deal was done by time CBRE etc was retained.
It’s a “art” not a science
@NWL – buy-to-let mortgages i.e. investors in residential property (not owner-occupier) remained at 80% LTV.
Do you really think it makes no difference to a funding decision if the lease (or business idea) provides a guaranteed income or not?
@PGD, oh just to be clear, I think UORR leases were very attractive to investors and their funders in the banks. Of course you can never guarantee that your tenant won’t go bust but UORRs with personal guarantees were a pretty good investment bet, I don’t disagree with that at all. I was just making the point that banks also advanced money at 100% LTVs (wasn’t Charlie McCreevy’s loan for the property at Ladycastle in the K Club from INBS at 107%?) and plainly there was no lease with residential property lending. The point I was getting at was that availability of credit was at the heart of the property bubbles (commercial and residential). If you didn’t have UORRs and say you had continental type of leases which adjusted rent to inflation or turnover then given the predictions for almost unlimited expansion at best or soft landing at worst, I still think that lending to the commercial sector would have been massive.
But the point I was making was that banks were happy to shovel money into homes at 100% LTVs which just went to highlight their general attitude on lending to the property sectors.
@ John Gallagher Unfortunately this particular art collection destroyed our economy. Pity nobody told Seanie.Fingers or Gleeson they were being advised by a bunch of artists.
I understand most of these artists are now based at the Nama School of Art. Perhaps they might consider putting some of their more outrageous works of art on public display. It might make an excellent tourist attraction.
@nwl
I dont think you understand the massive difference in eurozone lease law versus Ireland`s.
Let me explain. In France there are 3/6/9 leases. You agree a rent and the lease length is nine years adjusted by say the CPI. In year three the tenant can break the lease,in year six the tenant can break the lease and in year nine the rent is reviewed to market rent. If the tenant is unhappy with this new rent he can break the lease.
In Ireland the tenant signs a twenty five year lease.no break clauses and rents are reviewed every five years using the ratchet upward only rent review system.
Say your tenant is a blue chip tenant eg Vodafone. In France Vodafone could walk after three years–in Ireland Vodafone can walk after 25 years. During the boom, rents in Ireland were rising at ten times the rate of inflation—in France they rise at the rate oif inflation.
Please please try to appreciate the effect of Irish toxic lease law on the valuation model–it was dynamite. Also the effect it had on prefunding major commercial property developments and the massive oversupply of commercial property in Ireland. All this overdevelopment was supply driven with the toxic lease law the poison that was driving it.
Please believe me, you can never overestimate the impact this toxic lease law had . Hence no third world country and certainly no other member country would ever tolerate this poison.
@John, you keep stating that tenants sign up to leases in Ireland for 25 years with no breaks. This seems to be the core of your argument as a tenant could walk if there was a break.
You are incorrect, in Ireland some leases would have been for 25 years with no breaks but very few leases are structured this way, the majority of leases have breaks every 5 years, possibly with a penalty – this is the norm.
This allows tenants to break and walk every 5 years if they wish. Any tenant who signed up to a long lease should have realised the inflexibility they were putting themselves in before they signed up to it.
It is clear you are only looking at this argument from one angle (the retailer).
Many retail leases are 35 years with no breaks. I have a thirty five year lease with no break and UORRs and I signed a twenty five year UORR lease with no break three years ago. These retail leases were the industry standard.
These are FACTS–not your FICTION.
John Corcoran
M.Sc Economics
London School of Economics and Political Science
@John/Room 101 – there seems to be a difference of opinion
(1) “Many retail leases are 35 years with no breaks” – John
(2) “some leases would have been for 25 years with no breaks but very few leases are structured this way” – Room 101
Any links to sources available for either claim?
@John: 35 year leases have not been initiated for some decades now. The last one I saw established was in the early 70s. Most have run out or are close to running out, at this time. 25 year leases with no breaks are another anomaly. All leases now have breaks and these can be exercised subject generally to a contribution to the landlord’s fit out if it is specific to the tenant and has been rentalised.
For the last half century many tenants sold their leases at a profit as they were below the market rents. It is only now that a premium is required if they dispose of them. That is a function of a free market.
If the 25 and 35 year leases were so toxic and were the cause of the commercial property bubble – how come that despite the fact that these leases have been in existence for the past two centuries, they only caused the bubble now?
@WSTT
All your facts are fiction. I have a 35 year lease dated 1985 with 9 years remaining. I also have a 25 year lease dated 2007 with 21 years remaining , both leases have five yearly upward only rent reviews and no break clauses. These were the industry norm organised by the troika, the Society of Chartered Surveyors,the Law Society and the landlords /speculators.
UORRs tied to long leases have only been in existance since the 1960`s.
All your facts are fiction
@John. Not all. There are exceptions to everything. And anyone signing a 25 year lease with no breaks in 2007 was either a very bad negotiator (leases are negotiated) or was completely unaware of the state of the market and was badly advised.
Long leases have been in existence for centuries. In the 50s and 60s the length of leases dropped from 99 years plus to 35 and 25 years – as inflation kicked in and landlords were losing out in a big way. To protect their investment, UORR were introduced. It is only recently that the tenants have shown a preference for short leases as the residual term on leases has generally had an inbuilt value. The breaks are an even more recent phenomena and are a result of a nervous market.
In a recent letter to the Irish Times, Colm Lauder from the University of Cambridge wrote:
“There is a fundamental lack of understanding of the real estate market by those pursuing policy change in rent review legislation.
The “bias” in this debate is very much on the side of retailers.
The recent discussion on the issue of rent reviews has centred 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 policy changes have 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 Mr 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 of 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. The incoming government should be proposing positive policies to stimulate the commercial investment sector and in particular to attract foreign investment. 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. Is the incoming government really intent 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, the destruction that would bring to the wider economy is unthinkable. –
Yours, etc,
COLM LAUDER, Department of Land Economy
University of Cambridge, Wolfson College, Barton Road, Cambridge, England.
@WSTT
All your facts are fiction
Colm Lauder is a graduate of DIT Bolton Street. He has no qualifications from the University of Cambridge. He is currently a one year student at Cambridge University and may never have any qualifications from that institution.
What he writes is rubbish.
John Corcoran
M.Sc. Economics
London School of Economics and Political Science.
@John, the SCS pre-election submission on the question of UORRs is linked below and sets out quite a number of point on both sides of the argument, specifically including points which support commercial tenants, in particular retailers
http://www.scsi.ie/publications/submissions_files/uorrfeb2011
The property industry destroyed our country. The Society of Chartered Surveyors are the mouthpiece for the landlords/speculators/wheeler- dealers/syndicates etc etc .
In this publication that are demanding compensation for their landlord buddies ,but not for the tenants. Tenants businesses have been wiped out by this toxic lease law and many are still been bled dry by ruthless and greedy landlords. No third world country ,and no other eurozone country would ever ever tolerate this poison lease law.
Ireland has the most anti-tenant lease law in the world,the highest rents per capita in the world . This toxic lease law destroyed our country.
@WSTT
All your facts are fiction
Banning UPWARD-ONLY RENT REVIEWS
Letter in the Irish Times dated 3rd March 2011
Madam
In his letter (March 1st) Colm Lauder of the Cambridge department of land economy attempts to argue against banning upward-unly rent reviews.
I don`t know what the commercial property market is like in Cambridge,but over here it`s different. The dogs in the street know that there is a large excess supply and that either (a) there is going to be an awful lot of empty property or (b) a significent fall in commercial rents. Does Mr Lauder really think that banks will enhance their financial position by valuing commercial property as a multiple of artifically high rents,while ignoring the effect of zero rents on vacant properties? Or maybe he believes that there are no limits to bankers stupidity and everyone else`s gullibility.
This is the kind of argument which tends to score F when found in students essays
Yours etc
John Sheehan
School of Economics
UCD Belfield Dublin 4
In the us retail mkt where there is no uorr but anchor or larger tenants say above 10,000 sq.ft always sign 20 year leases with no break clauses with 4 five year options
Freestanding or “pad” tenants also sign them
The initial rent is fixed and depending on many variables may go up every 5 years or stays same but never to “market”
In effect an anchor tenant lease is flat or upwards only with a % rent clause renewal options may go to “market”
Impossible to finance sell or build without that commitment from anchor tenants second generation space possible to do a 10 year lease for larger spaces
5 to 10,000 sq ft minimum of 5 years
Below 5,000 3 to 5 years standard
Assuming the us retail market is efficient and no influence of uorr clauses major tenants still execute 20 year no break leases it’s not negotiable without it no developer could get a project built or financed or sell it.
Small shop tenants do sign 3 to 5 year leases with options at market or agreed upon terms but they normally only represent 10 to maybe 20% of the development which would not be possible without a 20 year lease from anchors.
@ John Gallaher
Hi John
There is a healthy commercial property market in all other eurozone countries without having our toxic commercial lease law. LTVs etc are much more prudent and construction is demand driven .
Not a expert on Europe but tripping over eurozone investors looking to invest in US RE which is a very dynamic market subject also to cyclical cycles with some winners and losers .
My own experience with Irish investors in US was eye opening to say the least I was asked to advice a number of them in 07 around same time US market peaked.
My advice was to wait that the market was at or near top I was told after the eh gentleman had one too many at lunch that my problem was I lacked “bal..” and that the Irish investors were fearless ….
At another evening one of the more prominent Irish RE players excused himself to spend some quality time in the washroom with a lady of the night he had met at the bar ……I kid you not …while he phoned his pilot to explain the delay ……
The lunatics took over the asylum ….
@John, why would you sign a 25 year lease with no breaks only 3 years ago ?
I cannot believe anybody would expose themselves like that. No breaks may have been industry standard back in the early days but 3 years ago ?
I am surprised that somebody with your Economic qualifications would sign up to something knowing that they would be stuck paying the same rent for the next 25 years.
I remember the first thing I learnt in during my first economics class (when I was 16) was booms and busts economic cycles.
@John: No, All my facts are not fiction. And ad hominem attacks repeated ad infinitum do not give your arguments credibility.
If you re-read the thread above, you will see that it your facts that are fiction – not mine.
You are trying to place the costs of your own mistakes on others. We all have choices. You made the wrong ones. We all have to carry the responsibility for our own mistakes.
@Room101
Firstly in 2007 UORRs tied to long leases was an industry norm—the troika, i.e. the Society of Chartered Surveyors, the Law Society and the landlords/speculators/wheeler-dealers-held the line and seldom budged on this toxic lease law. In the precise circumstances I was moved from one location in a shopping centre to another, I was downsizing my unit and my rent/service charges /rates.
I had given my word and even though I know the market was sliding I felt honour bound to complete the transaction.
Try to deal with the issue rather than the person.
My theory is –“If Ireland had regulor eurozone lease law it would have been impossible to have had a monster commercial property bubble“
Forget about my personal circumstances–address the issue.
@NamaJew
Thank you for having me–and best wishes to everybody in the future–Im off to the day job.
Lease law changed in the mid-90’s – I think in 1996. Up until then short term (highly reversionary) leases were 2 years 9 months and long leases were 35 years. These are ‘legal’ descriptions as far as I can ascertain. When the law changed, short leases became 4 years 9 months and long leases became 25 years. The detail can be negotiated in theory – in reality the asset owners still hold most of the cards and almost always dictate the terms.
So, it is highly likely many 35 year leases are still in place.
@wstt – Mr Lauder is not a grad or member of academic staff at the college he purports to represent in his recent letter to the IT. I have no problem with anyone expressing an opinion – but not when they attempt to wrap it in the gravitas of an august institution.