Investors with Paris property on their books will need to be at their diplomatic best this year as tenants seek meetings to review their existing contracts.Paris office occupiers wanting to cut costs already have the upper hand.
“For landlords, their lenders and tenants, it’s a big issue,” says Olivier Gerarduzzi, valuation associate at Drivers Jonas. “Tenants have plenty of powerful arguments on their side, while landlords are doing as much as they can to not lose them.”
Paris rental levels have been on the up since 2002, and have risen 18% since 2006. Linked to the cost of construction index(CCI), rents climbed by as much as 3.9% a year, and 10.5% in the third quarter of last year alone, before falling by 4.5% in the last three months of 2008 (see graph, opposite).
Nevertheless, a barrier was broken last year when rents on prime assets in the French capital rose by more than 25%. This will motivatetenants whose leases began in 2002 or 2003.
“The incredible increase in indexation has meant that, for the first time in years, tenants can ask for a rental review,” explains François Bonteil, real estate partner at Clifford Chance Paris.
Under article L 145-39 of France’s Code of Commerce, which dates back to 1954, tenants can take an uncompromising landlord to court. If the passing rent is 25% higher than themarket rent, tenants can apply to court to have their rent brought back in line with the market.
When faced with tenants eager to cut costs, landlords are now reacting differently, explainsAurélien Rosset,real estate office advisor atHenri James.“Landlords are now ready to talk, but around eight or nine months ago, this was not the case,” he says. “Tenants’ negotiating power is increasing as market rents are decreasing. They’re giving landlords an ultimatum:either you lower our rent, or we invoke the powers under the law.“
“We have carried out due diligence on leases for landlords,” says Bonteil. “Our clients are always open to negotiation, and this can sometimes result in an increase in the duration of the lease.” Court cases between landlords and tenantshave yet to take place.
Whereas last yearlandlords could fall back on a list of prospective tenants, now they face therealistic prospect of an empty asset. “The day you no longer have a tenant is the daythe banks can step in.Rents are the real issue right now,” says Philippe Depoux, chairman of Generali Immobilier France.
The need for dialogue between landlords and tenantsmay even be an opportunity for agents and advisory firms. “Property professionals are constantly e–mailing clients to remind them that their leases need renegotiating,” says Drivers Jonas’ Gerarduzzi.
But with the French capital having only ever experienced rental growth, agents risk not having teams in place to negotiate on behalf of landlords and their tenants.
Renegotiation services offered
“There aren’t many agencies which are offering a service of renegotiation,” says Rosset, who hopes to exploit tenants’ need for advice by offering to negotiate on their behalf. He adds: “There are already a few companies negotiating without the help of agents.”
Movement towards a new indexation methodcould prove timely. The need for a new index already has the backing of major industry players, including AXA Real Estate Investment Management and Unibail-Rodamco.
“There are new rules, and this is really a big opportunity,” saysChristophe Pineau, research director at BNP Paribas Real Estate. Instead of being based solely on the cost of construction, the newindex would take into consideration the cost of living and gross domestic product.
Dorian Kelberg, chief executive of France’s real estate industry body, the Fédération des Sociétés Immobilièrs et Foncières (FSIF),calls fora more “realistic” index the FSIF is targeting annual indexation of between 2.5% and 3%.
The FSIFsigned a protocol for areplacement index in March. French legislators are expected to make a decision on the new index this month.
The steady rise of Paris rents to as much as €900 per m2 a year is over. The average rent in the Île-de-France region is €313per m2 a year, according to Paris-based agency EXA-Immo’s first quarter 2009 report.
In the central business district, that figure is €473, while the La Défense area averages around €474. Savills, meanwhile, estimates prime CBDrents to be around the €626 markLa Défense rents arearound €561.
In the first three months of this year, take-up in the Île-de-France region was down by almost 25% compared withthe take-up level recorded during the last quarter of 2008, reportsEXA-Immo just 439,000 m2 was taken in the entire Paris region. Overthe same period, vacancy rose by almost 21%.
The evolution of rents will have more to do with the new deals that tenants manage to renegotiate for themselves than with index rises.
Meanwhile, agents could keep themselves occupied acting as renegotiation facilitators for landlords and tenants.
