It hardly seems to matter which European country you own real estate in, you can probably forget what you thought you knew about your tenants’ expectations from their lease.
A new paper from the European teams at law firm Linklaters takes a tour of the continent’s “evolving” leasing markets, where they said questions now abound as to whether the traditional institutional lease “remains the norm”.
Front of mind for occupiers of all types are flexibility – and not just in terms of the ability to take co-working space – as well as environmental, social and governance credentials.
In a comment that could speak for dealmakers in many markets, the Polish team said: “Landlords are having to be more flexible. The financing of developments is more expensive than ever, but at the same time, tenants are becoming much more aware and demanding.”
Gone green
In Belgium, green leases are being seen “more and more… although they are still not commonplace”, said the team.
In France too, landlords are finding that environmental and other ESG-related topics “are becoming central to negotiations”. Linklaters said: “Indeed, regulations relating to energy performance are affecting the letting of ‘tertiary buildings’ related to the services sector as well as residential buildings.”
Many German tenants “are expressly asking for ESG-related provisions and are open to spending money in this regard”, the firm said, including new consumption-measuring systems and electronic charging stations.
In Luxembourg, tenant demands in the retail and office markets are changing and landlords are being forced to respond.
“ESG considerations are on the up and tenants are asking for more sustainable real estate,” the Luxembourg Linklaters team said. “Businesses claim that this will lead to an increase in value and improve their corporate image and branding. We are seeing landlords announcing a significant number of new prime and ESG-focused office developments due to come to the market in the forthcoming months and years.”
The Luxembourg team added: “Landlords should remain wary of tenants’ environmental preoccupations and continue carrying out climate-friendly practices as well implementing ‘tenant-friendly’ terms around flexibility and affordability.”
New rules
Linklaters’ UK team, led by global real estate head Andy Bruce, said: “Many tenants are now demanding more ‘tenant-friendly’ terms centred around flexibility and affordability – the general consensus from tenants is that lease terms need to better reflect the needs of businesses in an age where trade is less focused around bricks and mortar premises and omnichannel operations are the norm.”
That means shorter lease terms with more break rights as well as “rightsizing” options letting occupiers scale up or down on-site.
“Landlords are increasingly willing to work with tenants to find new approaches which work for both sides,” Bruce and colleagues said. “Some landlords, for example, have acknowledged that a ‘one size fits all’ approach to leasing no longer works, and we are seeing new models come to the market which reflect the varying needs of tenants. As we continue to witness a shift away from the ‘traditional’ institutional lease, it will be interesting to see if and how investment and valuation models will respond.”
German tenants are now generally “more self-confident”, said the firm, and are asking for more incentives such as landlord contributions, known in Germany as build-out subsidies, and rent-free periods.
In Belgium, tenant incentives such as rent-free periods and financial contributions from landlords have become increasingly common, the firm said: “In office leases we often see financial contributions for fit-out works to be carried out by tenants.”
In France, tenant incentives are now granted “very regularly”, said the firm – “rent-free periods are common, as are financial contributions from landlords towards tenants’ works, the amount of which usually depends on the length of the term of the lease, with greater amounts offered where the tenant waives its right to terminate”.
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