Uncertainty on rent reviews hits returns

PLANS by the Government to ban upwards only rent reviews in existing commercial leases has the potential to wipe €79 million immediately off rental income, according to the London researcher IPD.

Overall the impact on the Irish commercial property market could be quite severe, leading to a fall in values of possibly 20 per cent.

The uncertainty about the Government’s rent review policy has already triggered a 5.3 per cent fall in capital values in the three months up to the end of June – the sharpest decline since the nadir of the market downturn. Overall values have now fallen 63 per cent.

The rent review issue, along with uncertainties about the economy and the banking crisis, have combined to push overall returns from the commercial property market into negative territory in Q2 at -3 per cent, the lowest rate since September 2009.

However, current income returns remained steady at a healthy 2.4 per cent during the quarter.

The IPD study, which is carried out in conjunction with the Society of Chartered Surveyors Ireland, also shows that rental values in the index continued to fall, dropping by 5.5 per cent in the three months.

This has brought the fall in cumulative rental values since December 2008 to -43 per cent.

There was little distinction in the performance at sector level: industrials fared worst of all with values falling by 5.6 per cent while offices and retail slipped by 5.3 and 5.1 per cent, respectively.

Rental value declines were sharpest in the office sector, down 5.8 per cent, despite recent reports of improvements in Dublin office take-up.

The IPD’s Malcolm Hunt said that while a Government announcement on the rent review policy was expected any day now the uncertainty in the market was having a dire effect.

Speculation about the effects of such a policy, amid continuing chaos in the Eurozone, is still impacting commercial property performance.

Values in Ireland are therefore suffering from declining occupier demand and extremely nervous investor sentiment. As a consequence, transactional activity had remained almost non-existent.

Hunt said that on the sidelines Nama would be watching the situation with trepidation, well aware that the majority of its distressed loan book may now have lost another 5 per cent of its value “and if the retrospective rent reviews are implemented, it could lose a further 20 per cent”.