The globalisation of trade and finance means that investors can consider opportunities anywhere in the world. They therefore need standard tools to compare these investments, and valuation is one of them. For real estate, such standards exist in the shape of the international valuation standards, the Blue Book, produced by the European Group of Valuers’ Associations (TEGoVA), and the RICS valuation standards. However, real estate assets are dependent on the legal environment in which they are located. As such, internationally standardised valuation protocols can only do so much; local expertise will always be needed. For a given country, real estate valuation standards must strike the right balance between internationally recognised methods and local specificities. What type of valuation? There is no specific licence or accreditation for real estate valuers in France and while international standards Ð as released by the RICS or TEGoVA Ð are generally followed, they are not mandatory. Similarly, there is no single valuers’ association. Rather, there is a multitude, the main commercial real estate ones being IFEI and AFREXIM. In 1998, 12 of the associations put together some valuation standards for the French market, known as Charte de l’Expertise en Evaluation Immobilire (CEEM). This document, while not legally binding, is the principal reference for the French market. Some regulations do exist, but mainly for investors: the Organismes de Placement Collectif Immobilier (OPCIs), insurance companies and SociŽtŽ d’Investissements Immobiliers C™tŽes (SIICs) must have their holdings valued on a regular basis. These rules are set by the AutoritŽ des MarchŽs Financiers (AMF). One issue is that the AMF requires real estate holdings to be valued at their market price, which is not a recognised standard in either the CEEM or the French version of the RICS Red Book. As a result, the RICS recommends that real estate holdings of French investment companies be valued at their market value. It is worth noting that a 1971 legal decision made site inspection mandatory as part of any valuation. Valuers not complying may be liable for the difference between the estimated market value and the price achieved. Who needs them? Broadly speaking, there are three groups that require valuations: investors, lenders and insurance companies. • Investors: real estate holding companies can take different forms in France. The most common private structures are •Lenders: banks use valuations for real estate financing. The French situation is unusual, with the real estate market having previously been dominated by CrŽdit Foncier, established in 1852. Competition does now exist, but many of the current practices, including valuations, were influenced by it. • Insurance companies: these also require their real estate holdings to be valued on a regular basis by independent valuers. Methods Depending on the type of real estate being valued, the following approaches are generally used: • Sale comparison approach: this is the method of choice for residential properties. • Income approach: existing commercial real estate is usually valued with the income approach. Although the direct capitalisation approach has previously been dominant, the discounted cash flow (DCF) approach is now used by all major valuation companies. Different direct capitalisation methods are used: hard core and layer, or term and reversion. Assets operating as going concerns, such as hotels, restaurants and golf courses, are also valued through the income approach. The difference being that the net profit, instead of the net rent, is used as a basis for the calculation. • Construction cost: this is mostly used for new properties, or when required for specific needs (eg for German banks). • Residual land value: this is the method used for valuing plots of land. Market data The French market is considered transparent, although data may not be as readily available as it is in other markets. This is because of the role played by the notaries. They hold a monopoly position given their involvement in all real estate transactions and consequently constitute the most comprehensive source of information. However, their publication suffers from two shortcomings: (i) expense; and (ii) the delay between transaction and publication, making the information less relevant for comparison. In an effort to gather and publish current data, Immostat was set up in 2001 by CBRE, DTZ, Jones Lang LaSalle and BNP Paribas Real Estate. It has since become the leading source of reference for property data. IPD also publishes multiple real estate indices, including the IPD-Immostat index, and several private publications provide periodic market information, such as BusinessImmo and ImmoWeek. There is nevertheless a structural imbalance to the French real estate market: the Paris region (Ile-de-France) represents the majority of the investments, and while this market is very well covered by market data, relevant information on regional markets tends to lag behind. Specifics of the French market Areas There are various types of area measurements. The most commonly used for commercial property are: • Surface hors-oeuvre brute (SHOB); • Surface hors-oeuvre nette (SHON); and • Surface utile (SU) brute and nette. Finally, areas for retail properties are usually weighted based on visibility from the outside: this is called “surfaces pondŽrŽes” or “zone A”. Retail units are divided into 10m bands of depth from the shop window at ground level. The first band is weighted at 100% and a discount is applied to the next one. Corner locations usually receive a premium and can therefore be weighted at more than 100%. Office blocks, archives, underground space and other “dark” areas may also be weighted by 30-70% of their physical area, which allows for like-for-like office rents on a weighted per-square-metre basis. An important area measurement is the “surface privative”, created by the Loi Carrez and promulgated in 1997. This area (equivalent to that of the floors and buildings closed and covered after deduction of the surfaces occupied by the walls, partitions, steps and stairwells, gutters, downspouts, doorframes and window frames and the parts of the building at a height lower than 1.8m) Lease contracts French leases for commercial properties are relatively standard and based on legislation from 1953. The term is a minimum of nine years, with break options for the tenant every three years. Twelve-year leases are common for retail properties. Leases can be agreed for longer terms, but it rarely happens in practice. Tenants may forgo their option to terminate every three years, making the lease a fixed six- or a nine-year lease. This structure has been tested by the courts and is today commonly used by landlords as a way to maintain occupancy. In exchange, tenants normally receive rent concessions, particularly in a depressed market. Commercial leases are automatically renewed on expiry and the tenant must be indemnified if the landlord does not wish to renew. The rent can only be increased based on the evolution of the chosen index, including at renewal. There are three main indices: Indice du Cožt de la Construction (ICC), which is the construction price index; Indice des Loyers Commerciaux (ILC), which is used for retail properties; and Indice des Loyers des ActivitŽs Tertiaires (ILAT), used for non-retail commercial spaces. The only exception is if the physical environment or the tenant’s activity has changed. In such cases, rents can be renegotiated at market rent. In addition, the following special cases exist: • “bail précaire”: a short-term lease of up to 23 months. The tenant can terminate at each new month; and • “bail loi 48”: named after a law passed in 1948, this is a lease for residential tenants. Under such leases, the rent cannot be increased freely, and the lease is renewed until the tenant moves out. Such leases are increasingly rare. Commercial leases in France are usually net, with the tenant being responsible for all operating expenses and tax, with one exception: major repairs. These are defined in Article 606 of the Civil Code, and they usually remain the responsibility of the landlord. Again, this is open for negotiation to obtain longer fixed- term leases. The base rent is therefore close to the net operating income, with the exception of lease concessions, including tenants’ improvement, which can be substantial in weak rental markets. Tenure There are four main types of tenure: • Pleine propriété: freehold; • Copropriété: co-ownership or condominium; • Bail emphythŽotique and Bail ˆ construction: different types of long leaseholds; and • Division en volumes: a volume co-ownership, where the whole volume of the property is divided between the co-owners. This right is not found in the Civil Code, but was invented by developers and tested and found suitable by the courts. For hotel and retail properties, a distinction is made between “murs” and “fonds”. The latter is the goodwill represented by the operating business, which includes, among others, the customer basis, the brand name, fixtures, furniture and equipment, etc. The murs represent the real estate itself, thus comprising the site and the core building. Valuers may have to value murs and fonds separately, as both parts are treated as ownership rights. However, only the murs are able to be mortgaged. Transaction costs Transaction costs usually amount to around 6.2% of the purchase price and are to be borne by the buyer. There is, however, one major exception: properties that are sold for the first time within five years of completion, which may include a major renovation. In this case, the property can benefit from reduced transaction costs of around 0.8%. This article is based on a breakfast seminar held by the IPF in 2013. Piet Kok is head of valuation and research at WestImmo and Benjamin Deljurie is the principal at Delarim Services
société civile de placement immobilier (SCPI) and OPCI. Both require valuers to assess their holdings. REIT-type structures also exist, such as the SIIC, which requires real estate valuations and regular valuation reviews.
must be measured and included in the draft and final sale contract of the unit from all condominium buildings. The absence of that area measurement can nullify the sale.
The globalisation of trade and finance means that investors can consider opportunities anywhere in the world. They therefore need standard tools to compare these investments, and valuation is one of them. For real estate, such standards exist in the shape of the international valuation standards, the Blue Book, produced by the European Group of Valuers’ Associations (TEGoVA), and the RICS valuation standards.
However, real estate assets are dependent on the legal environment in which they are located. As such, internationally standardised valuation protocols can only do so much; local expertise will always be needed. For a given country, real estate valuation standards must strike the right balance between internationally recognised methods and local specificities.
What type of valuation?
There is no specific licence or accreditation for real estate valuers in France and while international standards Ð as released by the RICS or TEGoVA Ð are generally followed, they are not mandatory. Similarly, there is no single valuers’ association. Rather, there is a multitude, the main commercial real estate ones being IFEI and AFREXIM.
In 1998, 12 of the associations put together some valuation standards for the French market, known as Charte de l’Expertise en Evaluation Immobilire (CEEM). This document, while not legally binding, is the principal reference for the French market.
Some regulations do exist, but mainly for investors: the Organismes de Placement Collectif Immobilier (OPCIs), insurance companies and SociŽtŽ d’Investissements Immobiliers C™tŽes (SIICs) must have their holdings valued on a regular basis. These rules are set by the AutoritŽ des MarchŽs Financiers (AMF). One issue is that the AMF requires real estate holdings to be valued at their market price, which is not a recognised standard in either the CEEM or the French version of the RICS Red Book. As a result, the RICS recommends that real estate holdings of French investment companies be valued at their market value.
It is worth noting that a 1971 legal decision made site inspection mandatory as part of any valuation. Valuers not complying may be liable for the difference between the estimated market value and the price achieved.
Who needs them?
Broadly speaking, there are three groups that require valuations: investors, lenders and insurance companies.
• Investors: real estate holding companies can take different forms in France. The most common private structures are société civile de placement immobilier (SCPI) and OPCI. Both require valuers to assess their holdings. REIT-type structures also exist, such as the SIIC, which requires real estate valuations and regular valuation reviews.
•Lenders: banks use valuations for real estate financing. The French situation is unusual, with the real estate market having previously been dominated by CrŽdit Foncier, established in 1852. Competition does now exist, but many of the current practices, including valuations, were influenced by it.
• Insurance companies: these also require their real estate holdings to be valued on a regular basis by independent valuers.
Methods
Depending on the type of real estate being valued, the following approaches are generally used:
• Sale comparison approach: this is the method of choice for residential properties.
• Income approach: existing commercial real estate is usually valued with the income approach. Although the direct capitalisation approach has previously been dominant, the discounted cash flow (DCF) approach is now used by all major valuation companies. Different direct capitalisation methods are used: hard core and layer, or term and reversion. Assets operating as going concerns, such as hotels, restaurants and golf courses, are also valued through the income approach. The difference being that the net profit, instead of the net rent, is used as a basis for the calculation.
• Construction cost: this is mostly used for new properties, or when required for specific needs (eg for German banks).
• Residual land value: this is the method used for valuing plots of land.
Market data
The French market is considered transparent, although data may not be as readily available as it is in other markets. This is because of the role played by the notaries. They hold a monopoly position given their involvement in all real estate transactions and consequently constitute the most comprehensive source of information. However, their publication suffers from two shortcomings: (i) expense; and (ii) the delay between transaction and publication, making the information less relevant for comparison.
In an effort to gather and publish current data, Immostat was set up in 2001 by CBRE, DTZ, Jones Lang LaSalle and BNP Paribas Real Estate. It has since become the leading source of reference for property data. IPD also publishes multiple real estate indices, including the IPD-Immostat index, and several private publications provide periodic market information, such as BusinessImmo and ImmoWeek.
There is nevertheless a structural imbalance to the French real estate market: the Paris region (Ile-de-France) represents the majority of the investments, and while this market is very well covered by market data, relevant information on regional markets tends to lag behind.
Specifics of the French market
Areas
There are various types of area measurements. The most commonly used for commercial property are:
• Surface hors-oeuvre brute (SHOB);
• Surface hors-oeuvre nette (SHON); and
• Surface utile (SU) brute and nette.
Finally, areas for retail properties are usually weighted based on visibility from the outside: this is called “surfaces pondŽrŽes” or “zone A”. Retail units are divided into 10m bands of depth from the shop window at ground level. The first band is weighted at 100% and a discount is applied to the next one. Corner locations usually receive a premium and can therefore be weighted at more than 100%. Office blocks, archives, underground space and other “dark” areas may also be weighted by 30-70% of their physical area, which allows for like-for-like office rents on a weighted per-square-metre basis.
An important area measurement is the “surface privative”, created by the Loi Carrez and promulgated in 1997. This area (equivalent to that of the floors and buildings closed and covered after deduction of the surfaces occupied by the walls, partitions, steps and stairwells, gutters, downspouts, doorframes and window frames and the parts of the building at a height lower than 1.8m) must be measured and included in the draft and final sale contract of the unit from all condominium buildings. The absence of that area measurement can nullify the sale.
Lease contracts
French leases for commercial properties are relatively standard and based on legislation from 1953. The term is a minimum of nine years, with break options for the tenant every three years. Twelve-year leases are common for retail properties.
Leases can be agreed for longer terms, but it rarely happens in practice. Tenants may forgo their option to terminate every three years, making the lease a fixed six- or a nine-year lease. This structure has been tested by the courts and is today commonly used by landlords as a way to maintain occupancy. In exchange, tenants normally receive rent concessions, particularly in a depressed market. Commercial leases are automatically renewed on expiry and the tenant must be indemnified if the landlord does not wish to renew.
The rent can only be increased based on the evolution of the chosen index, including at renewal. There are three main indices: Indice du Cožt de la Construction (ICC), which is the construction price index; Indice des Loyers Commerciaux (ILC), which is used for retail properties; and Indice des Loyers des ActivitŽs Tertiaires (ILAT), used for non-retail commercial spaces. The only exception is if the physical environment or the tenant’s activity has changed. In such cases, rents can be renegotiated at market rent.
In addition, the following special cases exist:
• “bail précaire”: a short-term lease of up to 23 months. The tenant can terminate at each new month; and
• “bail loi 48”: named after a law passed in 1948, this is a lease for residential tenants. Under such leases, the rent cannot be increased freely, and the lease is renewed until the tenant moves out. Such leases are increasingly rare.
Commercial leases in France are usually net, with the tenant being responsible for all operating expenses and tax, with one exception: major repairs. These are defined in Article 606 of the Civil Code, and they usually remain the responsibility of the landlord. Again, this is open for negotiation to obtain longer fixed- term leases.
The base rent is therefore close to the net operating income, with the exception of lease concessions, including tenants’ improvement, which can be substantial in weak rental markets.
Tenure
There are four main types of tenure:
• Pleine propriété: freehold;
• Copropriété: co-ownership or condominium;
• Bail emphythŽotique and Bail ˆ construction: different types of long leaseholds; and
• Division en volumes: a volume co-ownership, where the whole volume of the property is divided between the co-owners. This right is not found in the Civil Code, but was invented by developers and tested and found suitable by the courts.
For hotel and retail properties, a distinction is made between “murs” and “fonds”. The latter is the goodwill represented by the operating business, which includes, among others, the customer basis, the brand name, fixtures, furniture and equipment, etc. The murs represent the real estate itself, thus comprising the site and the core building. Valuers may have to value murs and fonds separately, as both parts are treated as ownership rights. However, only the murs are able to be mortgaged.
Transaction costs
Transaction costs usually amount to around 6.2% of the purchase price and are to be borne by the buyer. There is, however, one major exception: properties that are sold for the first time within five years of completion, which may include a major renovation. In this case, the property can benefit from reduced transaction costs of around 0.8%.
This article is based on a breakfast seminar held by the IPF in 2013.
Piet Kok is head of valuation and research at WestImmo and Benjamin Deljurie is the principal at Delarim Services
