Pension funds may lose €1.5bn over new rent law

Changes to rent review provisions of existing property leases will have major ramifications for Nama, taxpayers, pension funds and charities says pension fund IPUT

IRISH pension funds with domestic property investments of more than €7 billion have experienced a serious fall-off in capital values over the past three years and could now face further write-downs of up to €1.5 billion if the Government attempts to change the rent review provisions of existing property leases, according to Niall Gaffney, chief executive of the Irish Property Unit Trust (IPUT).

The trust holds property assets valued at more than €427 million, making it the second largest property fund in Ireland after Irish Life. It paid its investors over €36.29 million in dividends in 2010, equating to a net yield of 8 per cent.

Mr Gaffney told IPUT’s annual general meeting last week that in the event of further write-downs in values, most of it would translate into larger pension fund deficits and obligations on companies who sponsored defined benefit schemes to make good these losses through cash injections over a short period.

He recalled that investment managers, acting on behalf of the pension funds, had already told the Joint Oireachtas Committee on Enterprise that 75 per cent of all retail tenants seeking relief from upward only rent clauses and who had provided the necessary financial and other data had in fact been granted concessions.

“It is our direct experience that this level of forbearance has not diminished,” he said. IPUT strongly believed in supporting viable tenants particularly when their business may be experiencing financial challenges.

They had seen their rental income fall by over 4 per cent or by almost €1.3 million largely through the granting of financial support to tenants who were experiencing financial difficulties.

The chairman of IPUT, Frank Close, said the proposal to challenge the rent review procedures had already damaged international investor sentiment towards the Irish commercial property market at a time when the country badly needed to attract overseas capital to the market.

“It will have major ramifications for Nama and the Irish taxpayer as well as the pension funds, charities and institutions that own most of the relevant property, also the publicly guaranteed banks that have loans outstanding on these assets.”

Mr Close said that international research company IPD had estimated if the proposal on rent reviews was fully implemented, it would depress property values by around 20 per cent, something that was extremely serious for all concerned.

The very suggestion of change had already created such uncertainty that the investment market would not function properly until the matter had been totally clarified.

Mr Gaffney said institutional investors who had a fiduciary obligation to clients, would be obliged to challenge the constitutionality of the Fine Gael/Labour proposal.

IPUT saw capital values in its fund fall by 8.8 per cent in 2010 following a peak-to-trough slippage of almost 60 per cent in the previous two years.

A strong income performance last year almost cancelled out a negative return in capital values.

As a consequence, the trust posted a total return of -0.5 per cent for the year, outperforming the IPD benchmark return of -2.5 per cent.

The better than expected returns last year were largely due to the trusts weighting of over 70 per cent in third generation offices largely in Dublin 2. The trust expects this sector to benefit first from the upturn in the office letting market expected in 2012.

The trust also attributes its strong performance to good rental collection (tenants were billed for €37.6 million and all but €78,000 was collected) and a reduction in the space vacancy rate from 8.2 to 4.5 per cent.