London office market tops league for transparency

London office landlords offer bigger incentives on average than their peers in Paris and Amsterdam and the market is also more transparent, according to a study by DTZ Zadelhoff, the Dutch unit of DTZ.

The study is based on rental contracts agreed in three key business districts in the European capitals: the West End of London, the Central Business District in Paris and the Zuidas - or South Axis - business district in Amsterdam.

In the past decade, rental discounts in London’s West End ranged between 10-25%, according to the study. This compares with discounts of 3-11% and 6-20% in Amsterdam. The figures relate only to new rental contracts and not extensions of existing contracts where the incentives are generally lower. In the Netherlands, gross rental discounts can rise to 40% over a period of several years for offices in less popular locations.

Incentives are generally offered in the form of one or more rent-free periods or discounts in the first year. Some landlords offer to pay for the moving or service costs to make the deal more attractive, and may also take care of the refurbishment costs. Other variations include a cash sum, limited contractual rental indexation, the option to end a contract before the term has expired, participation in development profit after sale to an investor or to charge for fewer square metres than measured. Almost all landlords offer incentives instead of structurally lowering the rent.

Effective rental prices, corrected for a five-year period, total €737 per m2 per year in London’s West End, €454 in Paris CBD and €285 in Amsterdam’s Zuidas. The La Defense business districts in Paris and Canary Wharf in London do not fetch the highest rental prices. Nowadays many companies have a preference for the more varied city districts. The CBD in Paris – roughly the area between the Louvre and th Peréphérique, and the West End in London, are better able to meet the demands of modern office workers.

Frank van der Sluys, head of research at DTZ Zadelhoff and co-author of the report, said: ‘It is widely known that gross rents are highest in London, but not that rental incentives are the highest as well.’

There are other differences, according to CEO Cuno van Steenhoven. The London market is the most transparent of the three and information about both rents and incentives belongs to the public domain. In the UK, changes to gross rental contracts and incentives are publicly reported and are not a topic of discussion. ‘The real estate markets in France, but also Germany are less transparent that the Dutch market.’

Van Steenhoven is a proponent of transparency on incentives as long as the information is included in the rental contract and not in secret side letters. ‘There shouldn’t be any secrecy. Our view is that incentives should be included in the rental contract, the terms should be clear for all stakeholders.’

Initially DTZ’s office in Germany also wanted to take part in the study, but this was hampered by the fact that its database does not go back as far as for the three other countries.

There are several reasons why a landlord might choose to offer incentives instead of lower rent. If there are more tenants in the same building, the other tenants could also demand a rental reduction if they were to find out that a new tenant is paying less than them. Some landlords use incentives in anticipation of market recovery so that the higher rental price remains intact and reductions are given for a restricted period. ‘If it’s clear that the market will probably not recover, then the landlord would be better off reducing the gross rent,’ Van der Sluys said.

An often-heard argument for giving away a rent-free period instead of a gross rental reduction is the value of the asset. Landlords believe that a higher gross rent automatically leads to a higher value of the building. In that way, they hope to avoid problems with the refinancing. But valuations do need to take incentives into account. Van Steenhoven: ‘In fact, an incentive is a premium on the solidity that a tenant offers for a guaranteed cashflow for a number of years. Landlords are willing to offer more for that security in locations where supply is greater than demand. In the current market, the landlord is willing to meet the tenant’s demands.’