NAMA casts its shadow over rent flexibility

According to today’s Irish Times the legislation to ban leases providing for upward-only rent reviews has been shelved in the interests of NAMA:

Nama sinks upwards-only law

The Government is not to proceed with the abolition of upwards-only rent reviews even though the legislation has already been passed by the Oireachtas, says FBD Retail Excellence which represents over 50 retailers. David Fitzsimons, CEO of Retail Excellence, told members it was very unusual for a minister to announce a measure in the Dáil and then not proceed with it. His interpretation was that advisers to the Department of Finance and Nama had insisted on not abolishing upwards-only reviews as this would further undermine asset values.

Legislation to end upwards-only reviews on new leases was approved by the Dáil before the summer. While it would not have affected existing leases, Retail Excellence says it would have “sent a strong message to the landlords”. Labour TD Ciaran Lynch has tabled a question in the Dáil enquiring whether the legislation is to be implemented.

25 replies on “NAMA casts its shadow over rent flexibility”

This is a bit if a red herring. A law making upwards only reviews in current leases and requiring valuers to take account of drops in turnover and net profits in an area would have made a difference.

As things are, only a twit of a tenant would sign up to a lease with an upwards only rent review clause these days. For that reason, the shelving or enacting of the law will not have any great effect in the short term.

In the long term, the legislation is necessary to stop upwards only reviews coming back so its enactment should not be delayed.

As someone involved in retail over the last 18 years this is total nonsense. Upwards only rent reviews means that where a retail location has taken a hit to trade due to say a new shopping centre/retail park close by rents cannot reduce to reflect this.

Think Stillorgan Shopping Centre vs Dundrum

We had a unit in the Royal Liver Retail park on the Naas Rd. It was the first retail park in Ireland and initially very busy but as new retail parks opened close by the store went from being the busiest to near the bottom. Still rents went up every 5 years as turnover declined. The store is now closed and the Royal Liver retail park is getting emptier and quieter. Yet it is less than 20 years old.

Commiting to a 20 year lease with upward only rent reviews in this climate would be folly. The big retailers will presumably push for break clauses and serious inducements up front (long rent free periods). Only large chains can take the risk.

Everything we do in this country seems to be designed to promote property over everything else.

Any Economist, irrespective of school of thought, will realise this is flawed thinking.

We are seeing, yet again, the effects of lobbying on a government who seem incapable of understanding basic economic principles.

Are we already starting to see the perverse incentives that NAMA will force on the government?

Do anything that reduces rent or property prices and NAMA suffers.
Try to keep them high and many business’ in the economy will suffer a slow painful death.


The issue of upwards only clauses may be a red herring in and of itself, but what it shows, as Dread_Estate points out above, is the potential for a leviathan like the Nama land bank to yield to all kinds of perserve incentives and lobbying from vested interests.

Quite apart from the moral bankruptcy of fleecing the taxpayer to bail out the stakeholders, Nama will turn the Irish government into a property baron of meglomanical proprortions.

This cannot end well!

Not quite a red herring.

Remember many of the properties being taken over by Nama are commercial empty retail space. The leases are not in place yet. Some retailers where there are leases will close over the next 12 months as they fail to survive. New leases will come into place.

It will be interesting to see if new leases without upward only rent reviews do emerge. But if Nama is the only landlord in town and you want a new shop…..

If rents can go down as well as up the long term value of the lease will have to reflect this. Most retail developments are sold on to pension funds and the like once fully occupied. They will pay less if the rent roll can go down.

I’m pretty sure I remember from my economics days that high rents mean high prices. Taxpayer pays again.

The (de)merits of upward-only rent reviews can be debated, but what seemed obvious to me is the ham-fisted way that Government went about trying to appease the retailers lobby (REI). There has been intense lobbying by REI for retailer reliefs, so the Government introduces a ban that

a) is not retroactive and therefore does not help the very people lobbying for relief

and b) if implemented would, in the midst slowing growing interest by int’l investors in Ireland (see: Tommy Hilfiger sale, Grafton Street), create a two-tiered investment market where certain values are attached to investment properties with upwards-only leases in place and certain value is attached to properties with flexible leases…

It seems to me the ban was introduced to give the impression of taking action to provide relief to retailers, while at the same time helping no one in the current market. If we’re going to ban upward-only rent reviews, this was not the way to do it.

@Stuart Blythman “Commiting to a 20 year lease with upward only rent reviews in this climate would be folly. The big retailers will presumably push for break clauses and serious inducements up front (long rent free periods). Only large chains can take the risk.”

You’re right. New commercial property leases – in retail, office and industrial – are already becoming more and more flexible. Ten year leases with breaks at year 5 are already occurring. Also already occurring, but off-market, are retailers negotiating for temporary rent reductions to navigate through the current difficulties.

@ Zhou
The average rent-free period on new commcercial leases in Ireland is now 20-24 months according to Knight Frank & CBRE. Add to this a low starting rent and a break clause after 10-years with an upward-only rent review linked to CPI (most are linked to inflation) every 5-years and a tenant may be seduced, after all inflation is very low

Totally agree. The developer who built the Stillorgan Plaza (across the road from Ireland’s 1st every SC) was a close friend of mine for the 5 years that i lived in Spain – he told me that it was the greatest White Elephant ever built in the country, but asking rents were kept high because of the location, irrespective of vacancy (was high too)

NAMA will be the largest landlord in the State and will be run by Chartered Accountants, who will do what all accountants do – secure their own fees first – then run NAMA like they approached PPARS at the HSE: put in Excel spreedsheets with a VBA fron-end and charge millions (according to a guy I know in I.T. there) to the State for NOT disposing of these assets

NAMA is really set up for blame games and political games.

The ones managing the assets will later (behind closed doors) claim that any realised losses are due to a too high purchase prices paid for the assets now.

The ones buying the assets now will later (behind closed doors) claim that any realised losses are due to the ones managing the assets could/should have done it better.

NAMA is said to break even -> No transaction can be done at loss
If the price paid through NAMA is too high and there is no deadline-> No transactions

Setting up price floors for rents and purchase price of properties will certainly make it easier to justify high prices paid for the loans. Unfortunately it will also make it more expensive for anyone doing business in Ireland. This will lead to a trade off between profitability (or rather loss minimising) of NAMA versus the possibility of increased economic activity and economic growth. The profitability will be easier to measure which might lead to a bias for profitability of NAMA.

Independently, I had an epiphany while talking to a shopowner about his rents and about NAMA at exactly the time this was being posted.

Firstly, regardless of what’s said today in the Dail, ‘long-term economic value’ on residential property could easily (and quite likely) be a good bit below current market price (thus it not being a coincidence that house prices are still falling), based on yields.

However, what struck me today was that in commercial property – where location and customer loyalty mean that certain tenants are not as flexible – the persistence of the no-downward-revisions clause would be manna for NAMA, so to speak.

Only such a scenario, where commercial rents are no worse than static, could give a ‘long-term economic value’ that has in any way a healthy yield.

What odds, then, that we’ll see similar in the residential lettings market, if only to force expost the case that NAMA was right all along!

For those interested in what kind of yield would lead to what kind of peak-to-trough cut, I have some calculations here:
The healthier the yield (i.e. the more NAMA is looking out for taxpayers’ interests), the bigger the cut.

I remember the Plaza – never worked. Not sure how its current tenant stays in business either.

@Patrick The A
Unfortunately it is businesses like Tommy H that have kept rents so ridiculously high here. They don’t seem to have to make money and pay top dollar. Then when rent reviews come along the landlord points to them as setting a new standard and up goes the rent. Can’t go on forever.

Good to see that Ireland is cutting the costs of doing business in order to become more competitive!

We need about 1,000 native English speaking doctors in Australia. Know any public servants who will be soon made redundant?

@Graham Stull
“what it shows, as Dread_Estate points out above, is the potential for a leviathan like the Nama land bank to yield to all kinds of perserve incentives and lobbying from vested interests”

“David Fitzsimons, CEO of Retail Excellence….His interpretation was that …”

You are basing your analysis on the interpretation of David Fitzsimons who represents those who want upwards only reviews abolished. Retail Excellence are not disinterested in this and it is not incoceivable that they would want to portray the delay on the rent review legilation in the worst possible light.

I do not see how NAMA impact on this if new tenants won’t sign up to upwards only anyway.

@Derek Brawn

I note your comment about “upward-only rent review linked to CPI”. That seems a contradiction in terms as CPI can go up and down but I can imagine how tenants might be “seduced”. However, I am sure you will agree that it is not common let alone standard in the current market.

@Derek Brawn

Would you have a link to the CBRE/Knight Frank reports which detail current average rent free periods? Cheers.

@Ronan Lyons

“However, what struck me today was that in commercial property – where location and customer loyalty mean that certain tenants are not as flexible – the persistence of the no-downward-revisions clause would be manna for NAMA, so to speak.”

Where are we talking about and do we think there are NAMA properties there?

Upward and onwards, the state has now got a vested interest in re-creating the bubble and letting retailers and entrepreneurs pay through the nose. Not only do we need to get rid of upward only we need to enforce a downwards shift to bring us in line with European averages. I wonder were upward only ever really legal or just allowed to protect pension fund investments?

Expect more and more distortions in rents, valuations, planning law, FOI, property rights etc as the government attempt to use a slash and burn policy to pave the way forward for NAMA. As regards Derek Brawn’s comment about tenants being “seduced” they should not need to be seduced. Rents should rise in an open and transparent way. Are the Green party standing over this too?

What a disaster and distortion of law and what an injustice. This has already been flagged in the high court as being untenable i..e. “upward only.” Tenants should not take this lying down and should bring the government to the European Court and/or to the European Competition Authority.

A case won there, ideally would have the government paying compensation to those who had to overpay and to those that had to close down due to “upward only” rent reviews. Those made redundant should also be compensated. This is anti competitive and will lead to more jobs being lost, what on earth are they thinking.

I have just negotiated for over a year to get retail/commercial premises at (hopefully) a thriving! location in south co Dublin. It took the landlord an awful lot of time to realise any tenant occupying and paying towards the service in building was worth 12months rent free, no rates/service first year, but I have to fit out an empty shell. I used the incoming no more ‘upwardly only’ rent reviews passed through the Oireachtas over the summer to get that clause removed during bargaining. Yes, I think I have a pretty good deal and have secured a 50% rent discount over the process of negotiations, and tenant-friendly lease break clauses after the 4th year but like stamp duty/property tax announcements, or speculation by the government – this sort of Nama-meddling in the free market is a disaster, and paralyses transactions.

@Stuart B
Agreed, it can’t go on forever. Hopefully the Government will be a bit more savvy about how they phase it out, if they do in the future.

Then again, we only have to read a few posts on this blog to realize how unlikely a deft change to lease structures and the property market will be.

Grafton Street rents are the fifth highest on earth. Irelands population is similar to the Greater Manchester Area. The country is bankrupt and these bubble rents cannot fall because of upward only rent reviews. Tenants and sustainable businesses are being bled dry by reckless landlords who knew at all times that these rents were never sustainable .

The Government must protect its citizens from these cruel and irresponsible landlords by banning upward only rent reviews immediately.

I was wondering over the weekend if the same logic is being applied to Rent Supplement in the residential property market?

Considering the huge oversupply in the market, the current rates (see link below) are a tad generous. However, as they create a bottom for the market is this the government’s way of preventing residential rents collapsing and with it a further fall in residential property prices?

I’d be interested in hearing some economists perspective on this.

The Grafton Street tenants Association are confident that Minister Ahern will announce this week the banning of all future upward only rent reviews. This will aid all tenants and make the trading envirnment more dynamic and flexible–the entire economy will benefit from this overdue reform of commercial leases. This will bring the curtain down on this notorious leases clause.

Who knows the history behind the introduction of the ‘upwardly only’ rent reviews? I do remember that there were changes made back in the 1970s (?) as there were a lot of 99 year leases with no rent reviews and I believe this prompt legislative changes. I was very young at the time so I am not truely familiar with what actually occured. I do believe that landlords were getting a raw deal and the Government stepped in to rectify the injustice.
Just to continue on with the theme of the responses posted it is ridiculous to believe that Ireland needs to have upward only rent reviews so we can attract investment. How the hell do other countries manage their property markets? The day of the tenant holding the power is returning unfortunately it will only come once we have lost a huge chunk of established businesses. Landlords are biting off the hands that feed them. Soon there may be very few hands left. And lets not let landlords off the hook for driving business costs so high that they are now proactively driving up the level of unemployment and making Ireland uncompetative in the world arena.

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