Light at end of the tunnel for landlords

CPI and GST rise set to boost rents

Inflation and tax changes are coming to the rescue of landlords.

Commercial landlords have been having a lean time, with property devaluations and falling rents taking their toll on the books.

But things are looking up as factors combine to make healthy rent rises possible.

While rents for new leases are market driven, most rent reviews now factor in inflation in the form of the consumer price index (CPI).

Property researcher Alan McMahon says with the New Zealand Institute of Economic Research forecasting the CPI forecast to peak at 5.2 per cent next year, landlords will be smiling.

Mr McMahon, director of research for Colliers International in New Zealand, said that when rents were rising fast, tenants did not attach much importance to CPI clauses, assuming market rents would continue rising.

But with market rents falling, things have changed.

"Rent review clauses often use the higher of the CPI or market rents, and for years the higher of these two was always the market rent," Mr McMahon said.

"But now the CPI has come to the rescue of landlords because even at 2 per cent, it is higher than market rents. [The clause] was designed to protect landlords and it is having that effect."

As well, there will be bonus for landlords in the form of GST, he says. The GST rise from 12.5 per cent to 15 per cent in October will give inflation a one-off boost which will filter through to rent reviews through the CPI for two or three years.

"Despite market rents falling, tenants might have to pay a bit more than they expected in the next while... It will affect everybody who has a rent review between now and the next three years."

He forecasts that in the next year, rents which have fallen will flatten out while flat rents will increase.

Colliers also looked at commercial rents city by city, and compared the sectors of industrial property, and central business district (CBD) offices and shops.

Of the three main cities, Christchurch has the least volatile rents as land prices are not high enough to encourage a lot of speculative development, Mr McMahon said.

Within the different sectors of the commercial property market, industrial property is the first out of the recession as it is closely linked to the fortunes of manufacturers and exporters.

"The industrial sector is certainly leading the way, it's doing the best, retail is next and the office sector is still bringing up the rear," Mr McMahon said.

The chief executive of the Property Council, Connal Townsend, said that while some landlords had a right to take the CPI into account when negotiating rent reviews, it would be a strongly commercial consideration.

"For example, although CBD office vacancies might be improving, some landlords might resist rent increases in order to attract and retain tenants," Mr Townsend said.

- © Fairfax NZ News