Tuesday, 7 July 2009

Upward only?

The Irish Government has announced that it will be banning upward only rent reviews from next month. An unusual and, frankly, brave decision by a government whose country which has an economy that has been all about massive, unprecedented, growth for a lengthy period and which has now stalled. Certainly from this side of the Irish Sea it will be interesting to watch what happens in the Republic.

As for the UK and its upward only rent debate, what will happen next is that the retail sector will bring out the big guns again to argue the case that in these economic times there has to be a modicum of give and take in any contractual relationship, especially where this impacts upon the bottom line of businesses who are otherwise struggling for trade for reasons beyond their control. In response to this the property sector will engage with counter-arguments that these contracts are set down for relatively long periods and the charges set out are fixed for that period - "how would retailers feel if they had to set prices for five years not knowing what will happen in that period to their own costs?"

This last argument seems to have been taken as the stronger by British governments who are less courageous, perhaps, than their Irish counterparts because the Westminster government has seen fit not to outlaw this archaic practice and in consequence the SME retailers has borne the brunt of yet still further increases whilst their most major competitors who operate in the rented sector are often in a far stronger position to exercise negotiating power. The fact that very often, even these chains are unable to negotiate confirms the inappropriateness and ineffectiveness of the system in a so-called market economy.

So, do the property owners and agents have a point? I believe that they do! In just one very specific area, they have a point. I believe that if you are creating a product, or are the first line of marketing of a newly created product then you are likely to adding something to the economy by the process of creating. In the case where a new building is created then this would, to my mind, qualify for being able to recover the costs and achieve an equitable profit as with any new product. Rarely in these cases is there any significant research and development costs (I do not see land searches as R&D!) so the profits that would be fair and equitable should be in line with established products from any manufacturer - albeit the period over which this profit might be attained could be over a longer life cycle than say a loaf of bread.

Fair enough then, the builder, the developer and the owner all look to make a profit over the design and build. From that point on though, the profit is made from the recycling of an existing product - second hand indeed! In what other market do second hand goods gain, unquestioningly, a guaranteed increase in returns year after year with the power of the law to protect that interest? It beggars belief that the Thatcher and Major Governments did not see off this idea - is it not the very type of regulation that the neo-liberal economic theorists abhor? Perhaps the influence of vested interests prevailed, who knows? But it is very odd!

Landlords might argue that they invest and re-invest in their properties and this needs to be reflected in the costs. Of course it must, but that surely is the basis of negotiation, these factors are all taken into consideration and if the parties involved cannot agree then arbitration should be sought. What should not be allowed is for notional repairs and upgrades, or even real upgrades whose values are grossly exagerrated, to be used as justification for raising rents without evidence of the facts.

You have only to walk down any British High Street to see that there is a real malady. The prime shopping areas have achieved serious rentals (which then directly affects the valuations for business rates) that never go down under this strange system - this in turn prevents new or newer businesses from setting up in that area meaning that the local economy is forced to rely on major national and international organisations to occupy these spots. Nothing intrinsicly wrong with them being there, but they do not, indeed cannot, be as significantly beneficial to the local economy as locally owned businesses. When the bigger chains catch a cold elsewhere, they pull out of the local prime area leaving a hole that it is incredbly difficult to fill. This hits the local economy with a triple whammy - loss of local jobs (the large organisation will usually have employed local staff), loss of the continuity and visual amenity in the key shopping street (very often a factor that reduces footfall with the attendant knock-on effects on remaining businesses), and still no opportunity for new local businesses to get a foothold.

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