Paris rooms with views get price cap

Bloomberg

What is the price of a view of Paris’s best-known monuments? France’s Socialist government will tell you. For all Saint-Germain-des-Pres’ charm, long gone are the days when a tiny 11 square-meter (118 square feet) furnished studio flat commanded 656 euros ($724) in monthly rent. Real-estate agency Inter Immobilier last month had to explain to the new owner of the left-bank apartment that he could charge a maximum of 550 euros because of new Parisian rent caps that are now set to be rolled out across France.
“Landlords are feeling very frustrated,” Jacques Boucher, manager of real-estate agency Pierre de Paris in the 15th arrondissement said in an interview.
“Regulation imposed on what is supposed to be a free market is upsetting business plans.”
With a presidential election eight months away, the Socialist administration of Francois Hollande is encouraging tenants to ensure that the laws are applied in Paris and extending them beyond the capital, a move that executives warn is discouraging investment and risks hampering growth.
The rent caps introduced in Paris last year apply to all leases signed after August 2015. Landlords can’t charge more for a previously unrented unit and have to cut rent to the legal level for new tenants in cases where an outgoing one was paying more. Rents below the new limits have to remain unchanged following rules implemented in 2012 in several cities suffering from home shortages.
The only possibility left for increasing rent is an annual update bound by a legal index that was flat in the second quarter.
HOUSING SHORTAGE
“Investors will once again flee in light of this political announcement,” Jean-Francois Buet, president of Fnaim, the national federation of real-estate professionals, said after the government announced in June that the rules will be applied to suburbs of Paris as well as cities such as Lille and Grenoble by the end of 2018.
Of the 6.3 million privately rented homes in France, 4 percent are owned by institutional investors, down from 14 percent in 1990. A chronic shortage of urban housing fueled rent increases over the past decade, meaning that tenants are spending more and the politicians have taken up their cause. Tenants spend now about 31 percent of their income on housing, up from 25 percent in 2002, according to national statistics office Insee.

NO CAPS
“The Paris investment market will suffer in relation to London, Madrid and other large European cities where there are no rent caps in place,” said Patricio Palomar, Madrid-based director of alternative investments at CBRE Group Inc. Since last year,
rents in Paris are capped between 45.5 euros and 20.3 euros per square meter (10.8 square feet). The
exact limit depends on the location, size and characteristics of the home and building.
Broker Isambert said the prospect of legal action prompted one of its clients to slash the rent for a 9 square-meter studio flat in the exclusive 16th arrondissement to 350 euros a month from the 450 euros paid by the outgoing tenant. Olap, the government agency that collects rental data, downplays such concerns.

FOLLOWING THE MARKET
“The new rules simply prevent landlords from taking advantage of the housing shortage, they won’t lead to an overall decline in rents,” Olap director Genevieve Prandi said in an interview. “The caps were fixed above the most commonly observed levels of rent so as to follow the market, not overturn it.”
Overall, leases signed 2015 in the capital saw the pace of rent increases halve to 1 percent. That compares with annual gains varying between 6 and 12 percent between 2000 to 2013, Olap data show.
Even so, executives say the restrictions risk a knock-on effect on the broader French economy, which is still lagging neighbors such as Germany and Spain in terms of growth. Pierre Andre de Chalendar, chief executive officer of construction materials manufacturer Cie. de Saint-Gobain warns that landlords may scale back investment. Meanwhile, Paris-based real-estate investment company Gecina SA, which held residential assets worth about 2.67 billion euros on June 30, reported that its rental income rose a meager 0.2 percent on a comparable basis in the first half.
“This regulation does limit the increase in rental values,” Gecina CEO Philippe Depoux said during a call with reporters. “It prevents us from reaching the higher levels which we could consider.”

LEGAL PROCESS
Government agency Adil de Paris, which provides information on housing, this year dealt with 4,000 inquiries from landlords and tenants on rent controls, including 300 on the legal process to contest an amount. The law allows for overcharging only if a home boasts extraordinary features, leading Pierre de Paris’s Boucher to advise an owner to overcharge by 15 percent for a 19 square-meter flat close by Trocadero esplanade, given the size of the balcony and its electric shutters.
Still, such decisions are risky. A government-appointed committee this year examined about 70 complaints lodged by tenants. While the hearings are private, documents
obtained by Bloomberg News
show it consistently ordered landlords to apply the caps. Refusals to comply leave landlords subject to trial in court.
Recently, the government has started encouraging tenants in Paris to check their rents by promoting a website to “test rent” which enables consumers to check whether they are paying too much.
“This is a political move in the run up to next year’s general election,” said Michel Mouillart, an economics professor at Paris Ouest university. “While the steps contain rents at investors’ expense, they’re not dealing with the root of the problem — which is home shortages.”