John McCartney: “Short and Long-Run Rent Adjustment in the Dublin Office Market”
This post was written by Philip Lane
below is a summary of a new paper by John McCartney (CSO)
Research just published in the Journal of Property Research provides a
number of new insights into Ireland’s commercial property market.
The paper “Short and Long-Run Rent Adjustment in the Dublin Office Market”
reveals that office demand in Dublin is quite elastic - a 1% increase in
rents brings about a 1.13% decline in the quantity of space demanded. In
comparison, a similar rental increase would only reduce office demand in
London by between 0.20-0.54%. Author John McCartney said that this
difference was unsurprising given the relative status of Dublin and London
as global business locations; “London is a major world city and a global
financial services centre. As such many corporations simply have to
maintain a physical presence in London - irrespective of rents. In
contrast, despite the advantages of our 12.5% corporation tax rate and our
young, English-speaking workforce, Dublin is a less compelling business
location. Therefore, if rents rise too sharply occupiers will find other
suitable locations.”
Office demand also appears to be more sensitive to overall economic growth
in Dublin than in other markets around the world. The paper finds that a
1% increase in economic activity brings about a 1.7% increase in the demand
for commercial space in Dublin, whereas the average response in other
European, American and Asian markets is just 0.89%. One interpretation is
that a recovery in Ireland’s commercial property markets cannot be
decoupled from a recovery in the overall macro-economy.
The article also reveals that office rents are more sensitive to
supply-side shocks in Dublin than in many other markets, with increases in
the total office stock having a significant negative impact on rental
growth. McCartney argues that this may reflect a high ratio of speculative
to pre-let development in Dublin – a factor that can be attributed to the
small size of the average office occupier (which makes pre-letting
difficult) and, until relatively recently, the availability of tax
incentives which encouraged speculative construction in locations such as
the IFSC.
Finally, the research indicates that office rents in Dublin adjust more
slowly than those in other cities - just over 30% of the gap between actual
and equilibrium rents is eradicated within one year compared with an
average of 45% across European, US and Asian markets. This ’stickiness’ in
commercial rents may derive from institutional factors such as long leases
which impede the fluid functioning of the market.
May 30th, 2012 at 8:29 am
Would this not enter the shelf under the general heading of ‘No shit, Sherlock’. Just next door the ‘Stating the bleeding obvious’. Either way, it’s one whole hell of a distance to get to the ‘new insights’ section.
May 30th, 2012 at 9:50 am
@VincentH
Perhaps a fairer judgement would be to quote Alexander Pope:
‘What oft was thought but ne’er so well expressed’.
May 30th, 2012 at 10:46 am
@ Peter; what’s so truly truly terrifying is that this actually needs to be stated since no one has any of these connected stats to hand. You’d think that someone could write an algorithm of a morning and all these variations would be spat out by 3pm.
If we can model weather for the North Atlantic we can surely get results for cost adjustments within an economy as tiny as ours.
May 30th, 2012 at 11:10 am
Why did no other eurozone country have a massive commercial property bubble and bust?
The eurozone is a group of seventeen countries with a combined
population of three hundred and thirty million citizens. All member
countries have the same currency,the same central bank,the same
interest rates and the same commercial property lease law except one,Ireland.
Ireland has very different commercial property lease law to all other eurozone
countries. The three components of all countries commercial lease law
is the length of the lease,the rent determintion process and lease exit
strategies/break clauses. In all other eurozone countries lease lengths
are short,say three to ten years,with break clauses and rents are
indexed annually to changes in the consumer price index. In Ireland
lease lengths are long,say twenty five years,with no break clauses and
rents are reviewed every five years using the ratchet upward-only rent
review process. This review process used the highest rent as evidence
against all tenants and was open to malpractice and corruption.
Irish commercial lease law was a twinheaded monster which incentivised
the over-renting of tenants and more damaging,it was the rocket fuel
for the commercial property valuation model which created the monster
commercial property bubble. When this bubble burst it destroyed our
entire Irish banking sector. Reckless Irish banks lent tens of billions
against these ruinous leases,not against the properties. If Ireland
had had regular eurozone commercial lease law it would have been almost
impossible to have had a commercial property bubble and crash.
May 30th, 2012 at 11:15 am
The surveyors/auctioneers were responsible for three important and interlinking practices which created the bubble and crash.
First the valuation error i.e valuing all 5 euro notes as 20 euro
Second the ruinous commercial property lease law organiseed by a cartel.
And third,ninty five per cent of all property sold in the state is sold by surveyors/auctioneers.
They controlled where the vast property advertising money was spent. Almost all of it was spent with the broadsheet media and the Irish Times got the lion’s share. Therefore these auctioneers controlled the Irish Times property propaganda and all the other broadsheet media property propaganda. They had enormous influence in these papers editorial policies.
This third item was the fatal one–the media faciltating this propaganda. There were other useful idiots like the soft landing economists etc etc.
In matters of church or state the man with the money carries the weight
May 30th, 2012 at 11:16 am
The attached Lex FT article dated August 31st 2009 explains that the upward only rent review lease clause was a bomb waiting to explode. The UK escaped the explosion because soon after their property crash their economy boomed and the crisis was averted. In Ireland`s case the explosion destroyed our banks and our country. Upward only rent review tied to long leases, just didn`t destroy the tenants, it massively inflated the commercial asset pricing model which created the monster commercial property bubble.
UK commercial rents
Published: August 31 2009 20:22 | Last updated: September 1 2009 09:10
Most industries are suffering from falling prices. Not UK commercial property. Property trusts such as British Land and Derwent London have reported relatively upbeat earnings figures; in spite of continued falls in property valuations, rents have generally remained strong. This is largely due to “upward-only” contracts, whereby rents rise through the life of a company lease, whatever the state of the broader market. However good this industry norm might sound for landlords, it also represents a potential timebomb.
As Nomura’s rent-free move to a new London headquarters shows, the problem comes when contracts, typically for five years, but sometimes 10 or more, expire or otherwise lapse. If market rents drop in the interim, leases are renegotiated at lower rates. That is what is happening now, after vacancy rates doubled over the past two years. By March, new rental contracts in the City had dropped by more than a third. This has re-focused minds on the remaining life of property companies’ leases. At Land Securities, about 22 per cent of lease contracts will expire or can be broken by 2013. At Derwent London, it is almost half.
Upward-only rents have come under pressure before. In 2004, the government considered banning them. That initiative fizzled out in the boom, but now tenants have become increasingly vocal; Ireland banned such contracts in July after retailers complained they gave an unfair advantage to new entrants. Meanwhile, high street heavyweight Philip Green, owner of the Arcadia Group, is seeking other concessions. Landlords have successfully argued in the past that upward-only reviews keep overall rents down by providing certainty of returns and ensuring a stable supply of new properties. The recession, and property surplus, are putting paid to that. Meanwhile, the timebomb ticks on.
May 30th, 2012 at 11:19 am
THE VALUATION ERROR;
An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Now we know the net present value of a 5 euro note is 5 euro. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.
The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.
Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.
May 30th, 2012 at 11:21 am
Professor Neil Crosby’s online response to this Irish Independent letter “Bubble values” 29th February 2012 The Valuation error;
“The analysis may be simplistic but unfortunately it is not flawed. Banks ask valuers to tell them what the market value/exchange price is at a point in time and then lend vast amounts over time based on that simple number. The surveyor gives them that simple number and do not think it is their job to tell the banks that the question they have been asked is stupid on its own and what they should have asked for is the underlying value. It was obvious in 2005 and 2006 that prices in the property market were higher than could be sustained by any rational cash flow analysis. But in a culture that rewards individuals for short term performance rather than longer term perspective, it was in neither the bankers’ nor the valuers’ interests to stop it. I cannot see anything in what the UK regulatory authorities have proposed that makes me think they understand the role of property valuation in driving asset bubbles and will prevent it all happening again sometime in the 2020s.”
Neil Crosby
Professor of Real Estate and Planning
University of Reading
May 30th, 2012 at 11:23 am
The final banner;
http://www.youtube.com/watch?v=AnL3×06UQqY
May 30th, 2012 at 11:24 am
“This ’stickiness’ in
commercial rents may derive from institutional factors such as long leases
which impede the fluid functioning of the market.”
What about upward only rent reviews ?
Over to JC.
Surely the Dublin office market requires some of Bain Capital’s “creative destruction.
May 30th, 2012 at 11:42 am
@ Peter Stapleton
Peter and his colleagues were not shy in expressing their opinions on office valuations during the boom relying on upward only rent clauses to ramp up prices. I suggest that the chartered surveyors would have saved Ireland billions by reversing Alexander Popes quote and keeping their thoughts to themselves. Who was the surveyor who valued the Glass bottle site and lost millions for the Irish tax payer;
http://www.finfacts.com/irishfinancenews/article_1018415.shtml
Many companies are locked into upward only rent in long leases and will have to bankrupt in order to exit the leases. The next year will see many businesses closing down and lots more office space available. Namas valuations are based on these leases which are destined to collapse. The market will self correct despite all efforts to the contrary.
In the meantime I suggest that the chartered surveyors take Alexander Popes words to heart and stop publishing their pontless statistics about the dead commercial property market for which they are totally responsible.
May 30th, 2012 at 12:28 pm
21st February 2011
Dear Mr Corcoran
I am very aware of the strength of feeling on the subject of commercial rents and Fine Gael has addressed this subject in our manifesto as part of a drive to cut business costs by strengthing competition in sheltered sectors.
Specifically, in our manifesto we have committed to pass legislation to give all tenants the right to have their commercial rents reviewed in 2011 irrespective of any upward-only or other review clause.
Please do not not hesitate to contact me if you have any queries in this regard.
Best wishes
Yours sincerely
Sean Barrett TD
May 30th, 2012 at 12:32 pm
NAMAWINELAKE February 15th
UPWARD ONLY RENT REVIEW UNDER THREAT WITH FG AND LABOUR POLICIES. YIPEEE SAY COMMERCIAL TENANTS . BOO-HOO SAYS THE PROPERTY INDUSTRY.
Who-Shot -The -Tiger
“one paragraph says it all. He states we will become Zimbabwe(without the sun) if we legislate retrospectively for short term political gain”. “If it happens there will ne nobody left in employment in the country to turn out the lights–no matter what the retailers say”
SF ca
The blog on the rent review question and the excellent comments by all may be the most important issue that has ever been addressed on the site.
We are where we are,but we are discussing a new government policy,which could lead to the total collapse of the Irish economy and Irish society.
We all need to make contact with senior figures in the Fine Gael party and try to explain the consequencies of the proposed rent review legislation
May 30th, 2012 at 12:36 pm
Damian Kibred article Sunday Times February 2011
“A very strong PR campaign has been launched to protect the vested
interests of a small coterie of institutional property owners in the
debate over upward-only rent reviews. In tandem,there`s some
bleeding-heart commentary on the impact of the planned reforms on the
National Asset Management Agency`s balance sheet. The theory is that
Ireland will become a pariah state if it decides to protect its entire
rertail economy–including 200,000 jobs–by moving to a more
business-friendly property leasing system.
This campaign to protect the current leasing system is special pleading
of the worst kind. It is the sort that enabled the British Liberal
party to ignore the great famine of 1847 so its theories on market
economics might not be disturbed. Its time to get real “
May 30th, 2012 at 12:38 pm
14 Responses
on January 12, 2012 at 8:35 pm | Reply Will Baxter
1. The mass slaughter of serfs will commence immediately. No mercy will be shown. We will never allow these serfs market rents.
2. The Fine Gael and the Labour Party will be looked after in the usual way. We are indebited to the Fine Gael Landlords Association/PII.
3. The surveyors will continue to produce statistics showing 99.99% of landlords are granting 75% reductions. These figures will be audited by Ernst&Young.
4. The surveyors will continue to lobby to reintroduce the old arbitration system, of secret agreements,side agreements,straw tenants ,bungs,kickbacks, etc etc.
5. Our rentboys in the broadsheet media will continue to publish our puff pieces and the usual propaganda. Otherwise we will withdraw all advertisements and set up our own free internet property portal.
6. The surveyors will continue to lobby to reintroduce the upward-only rent reviews in all future commercial leases.
7. We are indebited to our independent property academics. They will be looked after in the usual way.
8 We will continue to distribute the serfs private and confidential information to cartel members and leak selected bits to our rentboys in
the broadsheet media.
9 Market rents must never be allowed in Ireland.
T O’Neill
The Cartel
May 30th, 2012 at 1:31 pm
@Marabelle
“Who was the surveyor who valued the Glass bottle site and lost millions for the Irish tax payer;..”
At the risk of being a property bore I’ll keep this short.
Can we get it into our collective heads for once and for all that BANKS PRICE PROPERTY not estate agents or surveyors, but banks.
The belief amongst the masses is that pricing and valuing property is the preserve of estate agents and the like - this is a mistake, a rather important one, because it gives banks an out clause they don’t deserve.
In 95% to 98% of ALL property transactions in the RoI a 3rd party lender is required to complete the transaction, in ‘normal’ times. It really doesn’t matter what the estate agent says a property is worth - the real acid test on valuation depends on what valuation a 3rd party bank is willing to lend to borrowers to buy i.e. the much famed LTV (Loan to Value) ratio. In simple terms if the bank doesn’t play ball there is NO transaction. Nada.NIL.Zero.
With no transactions there is no price discovery and you’re estate agents price at €1m is as valid as mine at €2m - without credit both are meaningless. Property is a credit market not a cash market.
Banks hold the keys to the property market, they determine the credit allocation and in a market which is credit dependant those in control of the credit control the price. Simple.
So blaming the ‘valuation’ error of the Glass Bottling site above on estate agents is missing the point. The price discovery only ever happens (well in 95% to 98% of cases) when banks get involved. Banks cement the stupidity of estate agents but don’t for one moment believe they are innocent bystanders. Banks always have the option to say no to any property deal. By saying yes to deals such as the Glass site banks assume the role of valuers as they crystallise the error. Most banking cock ups begin with a poorly analysed credit decision. Ireland Inc is a shining example of same.
A very basic yield analysis would have being telling banks from about 2000/2001 onwards to remain calm,very calm, instead they filled their collective veins with a credit induced drug cocktail and the hangover remains.
May 30th, 2012 at 2:15 pm
Is this a solo thread for John C or can anyone post?
May 30th, 2012 at 2:39 pm
Many rural towns within commuting distance of Dublin can boast of unoccupied commercial property ranging from office blocks through to light industrial units. Indeed, some towns can even boast purpose built call centres which have only ever being on eh calling list of NAMA.
@john corcoran
Changes in pensions and taxation encouraged many professionals to invest in their own office space - another stimulus.
May 30th, 2012 at 3:20 pm
I went to a presentation on the Swiss property market today. It was interesting to hear the estate agent discuss why the market is sound. It was an argument I had heard before. Immigration and low interest rates. I was thinking of that Morgan Kelly paper. A crash would suit nobody. So better not to talk about it.
May 30th, 2012 at 3:30 pm
@ John
In general, does a tenant look at the terms of a lease before or after they sign it. i.e. do they take a view on their forecast business profitability given the expected revenues and rental costs etc. and then make a decision on whether or not to proceed?
I would love to have a loan contract where I was able to go back and say that i was only going to accept the variable interest rate reductions and not increases - unfortunately the terms of the loan contract are signed and accepted at the begining.
May 30th, 2012 at 3:50 pm
must be a slow day down Grafton Strasse
May 30th, 2012 at 4:02 pm
Yes the Irish Times are the mouthpiece for the property industry/landlords and essentially a property play with a newspaper tagged on. Their chairman David Went was CEO of IL&P from 1998 till 2007 and was responsible for it’s demise. No Irish Times journalist will be writing a book about that story.
On the UORRs story riddle me this. FG,Labour,SF,the Greens and almost all the independents fought the last election on banning UORRs in legacy leases. FF now want UORRS banned in legacy leases. So all the entire Dail want this to happen
Minister Shatter late last May stated to property week magazine ” that there was a job crisis and under article 43.2.2 of the constitution the government will introduce legislation in the autumn to ban UORRs in legacy leases. Esteemed former SC Gerard Hogan agreed with the Minister and also stated “landlords are entitled to market rents but not to compensation”.
Minister Shatter also said “it would not affect NAMA’s valuations. Colm McCarthy agreed with the Minister in his report on ” The economics of adjusting commercial rents”
We live in a democracy,all TDs want to ban UORRs, the economic argument is compelling ,the Minister for Justice and SC Gerard Hogan said it’s constitutional.
The Mahon Report ” Corruption is systemic and endemic in Irish political life”.The vested intersts have prevailed over the public interest. FG/Labour are as corrupt or more corrupt than any previous Irish government.
May 30th, 2012 at 4:05 pm
On the 15th November 2011 the Grafton Street tenants notified the Directorate-General for Competition of the European Union(ref no.2011/121371) and the Irish government,of a cartel in the Irish commercial property market.
This cartel had imposed on all Irish commercial tenants,the most anti-tenant commercial lease law in the world i.e.upward-only rent reviews(UORRs) tied to long leases. Tenants bought into these leases which implied commercial rents would be set by independent parties. This process was arbitrary,not capable of objective justification,did not comply with data protection laws and was clearly anti-competitive as organised by a cartel. Our government either colluded with the cartel or was criminally negligent by signing these ruinous leases,and wasting its citizens money. No other member country of the eurozone tolerates this ruinous lease law. Reckless Irish banks lent tens of billions against these ruinous leases not against the properties. In 2008 Grafton Street became the fifth highest rented street in the world. On 28th February 2010 the Fianna Fail led government banned this ruinous UORRs lease clause in all future commercial leases. The tenants continued to lobby TDs to reform this feudal lease law in legacy commercial leases. In the general election of 2011 both Fine Gael and Labour included the reform of existing UORRs leases in its’ election manifestos. In it’s program for government the new government pledged “We will pass legislation to ban upward-only rent reviews in existing commercial leases”. This reform was designed to stop the unnecessary destruction of thousands of sustainable Irish retail businesses and jobs. The Irish people had spoken, democracy had triumphed.
The cartel responded immediately and began to mobilise the oligarchs. Ireland First and Property Industry Ireland(PII),aka the Fine Gael Landlords Association,were the cartel lobbyists,among others,to ensure this reform would never be implemented. PII was established in June 2011 and many of it’s directors were Fine Gael grandees and large party donors including a former Fine Gael Taoiseach’s son Mark Fitzgerald MD of Sherry Fitzgerald auctioneers a cheerleader of the property bubble,and the Cork based developer Michael O’Flynn. Kieran McGowan Chairman PII and David Went Chairman of the Irish Times,who together had presided over the bankrupting of Irish Life and Permanent Plc,agreed that the Irish Times would arrange the propaganda. The income from property advertising is a very significent part of it’s business model. The property editor Jack Fagan organised Bill Nowlan(W.K.Nowlan and Associates),Ann Hargaden(Lisney),Duncan Lyster(Lisney),Pat McArdle(economist) and CBRE, half page opinion pieces every wednesday. These were the cartel’s mouthpieces. Nowlan referred to the over-rented tenants as chancers and made the Zimbabwe,Banana Republic,Armageddon comparisions.
In July,Deputy Ciaran Lynch(Labour) began leaking proposed legislation to the Sunday Times,outlining the complexities of qualifying tenants,qualifying landlords,sunset clauses,landlords compensation,tenants compensation,receivership light etc. The u-turn was underway. The Grafton Street tenants met Minister Shatter on the 27th July. This meeting was designed to deaden expectations and prepare tenants for the u-turn. My response to this devastating meeting was to hang a banner on our Grafton Street store to remind Fine Gael of their election manifesto’s solemn pledge. The government and the cartel agreed on the spin,it was to blame Nama and the Department of Finance. The cartel was spinning the name of a specific DoF official who was to be the patsy. It was agreed budget day would be the least bad day to make the announcement. Minister Noonan mentioned landlords compensation to get Minister Shatter off the hook. Gerard Hogan SC had dealt with this point in his legal opinion,landlords were entitled to market rents,but not to compensation. In May 2011 Minister Shatter had stated to the Irish and international media there was an emergency job crisis and under article 43.2.2 of the constitution,in the “exigencies of the common good”, banning UORRs in existing commercial leases was vital. Furthermore Minister Shatter stated it wouldn’t effect Nama’s valuations. He had a copy of the esteemed senior counsel Gerard Hogan’s opinion and Colm McCarthy’s report to support this position. Democracy was overturned,the cartel had triumphed.
John Corcoran
M.Sc. Economics London School of Economics and Political
May 30th, 2012 at 4:06 pm
You know what happens, Tull. Everyone has a sophisticated model. The data goes back 10 years. The market has been rising for 15 years, since the last crash. Everyone marks to market. The next year they run the model and it’s benchmarked against last year.
Anyone who predicted a crash up until now was wrong. The regulator just wants the models to give sensible answers.
Sure how could anything go wrong ?
May 30th, 2012 at 4:59 pm
Commercial property is meant to be a service to enterprise,trade and employment. In Ireland it destroyed all three;
http://www.youtube.com/watch?v=Hgz5E4L9dWI&feature=related
May 30th, 2012 at 7:37 pm
@ JC
Did the business survive?
May 30th, 2012 at 7:43 pm
JC,
It still beats me why you won’t put you shops into administration like some of your peers and emerge with the debt written down. My local O’Briens is still open and selling sambos. Ivan Yates bookies shop in Blackrock are now operated by another franchise.
May 30th, 2012 at 7:59 pm
@tullmcadoo
“Why dont you go into administration , close down your business and lay off all the staff”? Try it and see how you would like it. Thats if you had a business of course, chances are you dont.
May 31st, 2012 at 12:29 pm
The krug and the Kork say- dont be stupid-be a smartie -come and join the No party.