The real cost of rent
Rent has now become the single biggest problem for retail businesses in Ireland. Is NAMA responsible for recent rate hikes or is it simply opportunism in effect?
16 March 2010
Figures from a Retail Excellence Ireland Survey show that 86% of Irish retailers had requested a rent reduction from their landlord in the past year, yet only 13% of those surveyed had received one, with landlords considering requests for rent reductions for another 33% of tenants.
It would seem like a no brainer for landlords to negotiate with their tenants and endeavour to be as flexible as possible in the current climate. The alternative is to lose a tenant, be left with an empty presmises for a time and when a new tenant does come on board, they will only have to sign a short lease and the upward only rent review clause will not apply.
At the coalface, Dublin retailer Seamus Griffin, who runs 20 Londis stores, the majority along the main thoroughfares of Dublin city centre, including Grafton Street, O’Connell Street, Dame Street and Stephen’s Green, said that a lot of businesses are suffering and this is evident when you consider the number of units free in the city centre. “There are 11 units on Grafton Street available at present which is indicative of how serious the problem is. Business is back at 2002 levels yet rents are at 2010 levels.
“We are talking to our landlords and we have been getting a reasonably positive reaction. There needs to be a common sense approach because a bird in the hand is worth two in the bush. It’s better to have a tenant than not have one at all because any new tenants will be subject to the new leasing laws. It would be very short sighted of a landlord not to negotiate.
“New tenants want five year leases with break clauses after two/three years with some even negotiating three to six months rent-free periods.” To survive as a retailer for the forseeable future, he says, it’s a matter of having to “work harder and be smarter.”
Landlords ignoring reality
Since Hughes & Hughes went into receivership some weeks ago with the loss of 225 jobs,(Around 120 of these will be employed by Eason Airport stores), it has come to the stage where retailers across the country are threatening to withhold rent in an attempt to force landlords to reduce rents.
Labour Party spokesperson on Housing and Local Government Deputy Cíaran Lynch thinks that it is incredulous that some landlords are ignoring economic realities and seeking substantial increases in rents. “It seems that the most exorbitant increases are being sought by property owners who are headed towards the NAMA process, perhaps hoping that an increase in rental yields will increase their NAMA valuation.”
After months of lobbying by the opposition parties, the Government succumbed and took part in a Dåil debate with the Labour Party on 9/10 March. During the debate Deputy Lynch laid down the ugly truth of the situation. “In the past two years, the accumulative drop in the retail sector was 30% in business terms yet, crucially, rent as a percentage of operating costs has increased beyond 20% for many shopping centre tenants while their sales continue to implode.”
Shopping centres hit
Certain landlords, who are protected by the upward only rent review clause, are seeking increases in the rental of units in shopping centres. Deputy Lynch cited the figures for a number of shopping centres that are engaging in this practice. “In Dundrum shopping centre the increase sought is 60%. In the Pavilions shopping centre in Swords it is 100%. In Monaghan Shopping Centre it is 46%, and in my own constituency of Cork South Central the landlord of the Wiltons Shopping Centre is seeking increases from hard-pressed tenants of between 36% and 58%.
“In a real market, demand meets supply and a price is derived. In the Irish commercial property market, however, there is an oversupply of retail property and a lack of demand for it yet rent prices continue to increase,” said Deputy Lynch.
“We have recently seen significant job losses in Arnotts, Debenhams, Superquinn and Hughes and Hughes – all reputable companies – and many other major retail employers are in jeopardy due to unsustainable upward only rent reviews. The Government must wake up to the fact that high rents are costing jobs, reducing both businesses’ and workers’ incomes, and contributing to the stagnation of the economy.”
An amendment to the Land and Convayancing Law Reform Act, 2009 to allow for downward rent reviews, only applies to new leases taken on or after 1 March this year. Therefore, for the majority of businesses, this is absolutely no benefit on them at all.
Deputy Dermot Ahern, Minister for Justice, Equality and Law Reform responded in the Dáil debate by acknowledging the problem but said that, “…the upward-only rent review clause was intended to protect a landlord’s income stream from the vagaries of the market. If that benefit is now to be removed by the State and not the market, we would be depriving individuals and companies of an important contractual right, and would be doing so without compensation and also in an arbitrary and discriminatory way.”
Deputy Lynch believes that the the Minister’s stance was ultimately about defending the NAMA portfolios and protecting the rental property bubble.
The NAMA effect
Retail Excellence Ireland (REI) has a similar viewpoint. It believes rents are being kept artificially high by banks transferring impaired property assets to NAMA. REI also claims the Government is compromised in promoting the NAMA initiative which, on the one hand, is designed to rescue the banks but on the other hand, is putting retailers under extreme pressure to pay increased rents which landlords and their banks are seeking to maintain at levels above current market value.
According to chief executive of REI David Fitzsimons, the whole NAMA process is keeping retail rent at an artificially high level in order to increase the asset value of NAMA-bound property loans. “The reality of the matter is that retailers will be forced to close their doors to business if reduced rental terms cannot be agreed across the board.
“The only way we can move forward on this issue – and speed up recovery in the sector – is with the direct and immediate intervention of the Government. Otherwise we are likely to witness more impasses between retailers and landlords on the issue of rent and ultimately more failures,” he said. He suggests introducing a code of practice for the leasing of business premises – such as that recently introduced by the UK Government, “to provide for greater openness and transparency and a more partnership like approach in terms of negotiation of lease terms between landlords and tenants.”
Working Group on Rent Reviews
Retail Ireland, the IBEC group, have managed to negotiate a new Working Group on Rent Reviews. The group was established by Minister Ahern and director of Retail Ireland, Torlach Denihan. Mr Denihan said that the Government can’t change the laws on rental leases because of legal difficulties and he rejects the claim that the Government is dragging its heels in changing the legislation due to NAMA. “The majority of properties are not headed for NAMA so there is no basis for this argument but legal change is going to take time.”
The working group will look at the scope for arbitrators to take account of economic and commercial conditions when reviewing rents and look at inserting break clauses into a lease where a tenant’s business has deteriorated due to circumstances outside the tenant’s control.
These provisions sound great in theory but of course it will take time before this comes to pass and unfortunately for most retailers already in trouble, time is another commodity they are lacking. Appealing to the humanity of one’s landlord seems to be the only real option on offer right now.