McCarthy: rent review regime is distorting Irish property market
11 July 2010
The extent of the economic collapse justifies radical intervention by the government in the commercial property market, leading economist Colm McCarthy has said.
McCarthy claims that allowing existing ‘upward only rent reviews’ remain in place will hinder the property market from returning to normal levels.
‘‘Should the upward only rent reviews’ clause in legacy leases be retained, it is likely to create serious market distortions and may already be doing so,” McCarthy wrote in a report on behalf of Retail Excellence Ireland (REI).
‘‘There have already been examples of retail tenants walking away from legacy leases, claiming actual or threatened insolvency. The claims are likely to be genuine in many cases.”
The government has banned the contentious clause in all new lease agreements, but many retailers say they cannot continue to pay boom-time rents and swallow further increases.
The Attorney General has advised the government that it cannot interfere with legacy contracts.
But McCarthy said that radical action by government was justified given the seriousness of the economic situation. The report, entitled ‘The Economics of Adjusting Retail and Commercial Rents’, examined upward only clauses and found they could keep rents artificially high.
REI chief executive David Fitzsimons said its own legal advice suggested that there was nothing unconstitutional about the retrospective abolition of such clauses. ‘‘There is a need for an adjustment in the market place which is being blocked by legislation.
There is a need for government intervention,” said Fitzsimons.
McCarthy, who authored the An Bord Snip Nua report, said that it was also important for investors that a properly functioning property development industry ‘‘eventually emerges from the wreckage created by the bubble’’.
‘‘The early elimination of the supply overhang, through encouraging the discovery of market-clearing prices and rents is the best guarantee that this will happen,” he wrote.
‘‘Keeping prices and rents artificially high depresses demand and activity, and ensures the prolonged survival of high vacancy rates.”
He also added that the National Asset Management Agency should dispel the ‘‘widespread perception’’ that it would exploit its dominant market position as the biggest commercial landlord in Ireland, keeping rents and property values at artificially high levels.
Posted by Caterina Nolan
14th July 2010.