High inflation likely to lead to rent hikes for many offices
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Germany’s high inflation rate of 7.5% last month is likely to lead to a rise in indexed office rents for many companies, according to JLL.
Many office leases contain so-called adjustment clauses, which are indexed to the cost of living and in almost all cases, the consumer price index of the Federal Statistical Office is used as a basis. ‘Some of these are graduated rents, but more than 80% are agreements that provide for the adjustment of the rent to the development of the general cost of living,’ said Helge Scheunemann, head of research at JLL Germany. For the contractual partners, this means that if the Consumer Price Index rises, the “cold” rent also rises.
JLL has evaluated indexed leases totalling more than 6.3 million square metres, which are located in almost 900 office buildings nationwide. In total, 82% of the leased space is accounted for by leases signed in 2010 or later, 45% in 2018 or later and 21% were signed after 2020. The wide variety of indexing clauses is striking, with nearly 100 different agreements registered in the sample. ‘With a share of 40%, the rule is that the inflation rate is added in full to the rent every year,’ Scheunemann added.
However, certain criteria often have to be met before indexation comes into effect. For example, in almost 20% of the cases analyzed by JLL, the underlying price index must have risen by 5% before there is a rent adjustment. In 10% of cases, that rises to 10%. As office markets developed in favor of landlords, the more frequently full indexing was found in leases, due to the landlords' increased negotiating power: ‘This was particularly evident in Germany's office strongholds in 2019 and 2020, when fully indexed leases accounted for 47%, compared to 36% previously,’ Scheunemann said.
With inflation rates rising sharply this year, Scheunemann is predicting that almost every lease will contain an adjustment clause going forward. However, he says the increasing supply of space will put tenants in a better negotiating position than they were a couple of years ago. ‘This is likely to lead to an increased willingness on the part of owners to agree graduated rents, particularly for large leases of 5,000 square feet or more, rather than requiring full annual indexation, even against the backdrop of what is expected to be persistently high inflation. This takes the risk off tenants and gives owners certainty in their calculations.’
Residential market also feeling the squeeze
And it’s not just the office sector feeling the squeeze: index-linked rents are becoming more commonplace in the residential sector as well. Some cities have a longer history of indexed rents than others, including Munich and Düsseldorf. Although these contracts were common in the commercial sector, they were not common among private landlords but this now changing because of rising inflation. Rudolf Stürzer, chairman of the Haus und Grund landlord association in Munich, says that's not the only advantage of the contract design: ‘The instrument creates transparency and prevents disputes that arise when the rent index is used as a basis,’ he said. Some landlords have also wised up to the fact that index-linked rents can be used to circumvent the rent brake, which caps rent increases in many German cities.
However, the German Tenants’ Association has voiced its criticism of indexed rents, saying that they pose a risk to tenants who may become saddled with ongoing rental hikes if inflation remains high. Haus und Grund in Munich says it represents about 420,000 housing units, equating to around 70% of the city’s residential stock. Index-linked rents used to account for around 40% of stock, a figure that has now risen to 60%, according to Haus und Grund. Comprehensive figures on index-linked rental agreements across the country are not available because landlords are not obliged to disclose such information.
Over in Hamburg, the Hamburg Tenants' Association notes that the number of index-linked leases has risen in the past three years; around 50% of new leases are index-linked, with the exception of the municipal SAGA and the cooperatives. Germany’s residential giants such as Vonovia may also increase the number of index-linked rental contracts. In a recent presentation for analysts, the group is believed to have stated that up to 140,000 of its apartments would be suitable for an index rental contract.