REGULATION CHANGES TO GIVE RISE TO MORE SHORT-TERM LEASES AND OWNER-OCCUPATION, says expert, Andrew Watt of Knight Frank
Changes arising from pending new regulations concerning accounting for commercial property leases will give rise to more short-term leases and owner-occupation, according to a leading property valuation consultant.
Andrew Watt, head of professional services at Knight Frank Ireland, warned tenants and landlords of commercial property to look closely at existing and future leases, taking into account the effects of changes to be introduced in 2014 under the International Financial Reporting Standards (IFRS).
Speaking at an IBEC hosted seminar held jointly by independent global property consultants Knight Frank Ireland and tax auditors and accountants BDO in Dublin (Wednesday, June 1), Andrew Watt noted that values in the commercial property investment market overall have fallen by 61% since their peak in 2007 and the market currently is more or less stagnant.
He noted that in the office market Dublin city is seeing some lettings with much of the market movement coming from new overseas entrants.
“Clearly over-renting is a big problem for occupiers, as well as for landlords and the banks”, he stated. “There is an increasing demand for short-term leases and flexibility in leases such as more break options. This trend is set to increase dramatically as a result of the proposed changes to property lease accounting”.
“Traditionally, occupiers have opted to rent so as to keep property off the balance sheet and be able to use capital elsewhere, but it will now make sense to put it back on the balance sheet by buying instead”, he said. “So I believe that going forward the market will see a growing trend towards more owner-occupation”.
“Clearly, debt availability for property purchases is at an all time low, but for those companies with access to cash and finance, the present weak market presents a buying opportunity. Two of the largest deals in the market this year were purchases by owner-occupiers – Google and Pennys”, said Mr. Watt.
According to Andrew Watt, the effects of the new proposed regulations will reduce the number of long-term leases; increase short-term leases with more flexibility and, in time, will encourage lessees to become owner-occupiers instead. “The market trend towards shorter leases, and owner occupation, looks likely to gather pace”.
Mr. Watt told his audience of lessees and lessors that he strongly suggested that they study their existing leases closely and look now at the effects of the impending regulations as their balance sheets and credit ratings will change once it is in place.
The joint Knight Frank Ireland and BDO seminar, chaired by Turloch Dennihan of IBEC, was addressed as well by John O’Callaghan, audit partner, BDO
Summary address by: Andrew Watt, Head of Professional Services, Knight Frank Ireland
The proposed International Financial Reporting Standards (IFRS) on leases will have a big impact on the commercial property market.
The proposal will effectively bring occupational property leases onto the balance sheets of companies that report under IFRS. At the moment, rental payments appear as an expense on a companies profit and loss account, but leases are effectively “off balance sheet”. The proposal will treat the leasehold as a liability, and the right to use the property as an asset, and this will have the effect of inflating balance sheets.
Occupiers are already starting to consider the new proposals in taking property decisions.
In the current market, tenants want flexibility, and few are willing to take long term leases. I see that trend continuing as a result of these proposals, because a short lease will have a much smaller impact on a balance sheet than a long lease.
Where occupiers have a long term commitment to a location, the decision to rent or buy becomes finely balanced under the new proposals. Traditionally, occupiers have chosen to rent property, so as to keep it off their balance sheets, and to be able to use capital elsewhere. Rent under a lease, and debt for a property purchase will be treated in very similar ways from an accounting point of view under the new rules.
In my opinion, we will now see more occupiers buy buildings to which they have a long term commitment.
Two major Dublin office occupiers, Google and Pennys have already bought office buildings this year, and others seem likely to follow suit. Clearly, debt availability for property purchases is at an all time low, but for those companies with access to cash and finance, the present weak market presents a buying opportunity.
In summary, long leases become less attractive under the new rules, and the market trend towards shorter leases, and owner occupation looks likely to gather pace.
Andrew Watt MRICS BSC (hons)
andrew.watt@ie.knightfrank.com