Guiding Lines: Dictated Terms
A deficit in quality office space is still allowing proprietors to dictate strict conditions on the conclusion of rental contracts. One of them is the long term nature of the contracts.For example, it is only possible to become tenants of Etmia II (Ulitsa Durova), Gorod Stolits (Krasnopresnenskaya Naberezhnaya), Legion II (Bolshaya Tatarskaya Ulitsa), etc. provided a contract is concluded for a period of at least five years. Tenants that aren’t ready to agree to such conditions are forced to sub rent or rent in lower class centers.
However, Knight Frank Russia and CIS consider that five years for a rental contract is not so long in Europe. In the developed markets of the UK and Ireland rental agreements are often for a period of 10 to 21 years, (with the right to break the contract at two specific dates during the period).
Valentin Stobetsky, director of the office real estate department at Knight Frank Russia and CIS, confirms that in the Moscow market of high-quality office real estate there is a practice in which the majority of landlords refuse to conclude rental agreements for periods less than five years. Developers having begun to consider the conditions more carefully. By giving a certain discount at the start of a rental contract, the proprietor requires guarantees on the return of investments. Office projects have begun to interest international investment companies and pension funds. The sale value of investment in a project to such funds is significantly lower if the tenants in the building have short-term contracts as the premises represents risks for the investor, for example the risk of space standing idle between tenants, additional investments on furnishing, rental holidays, etc.
However Nadezhda Isachenko, director of the department of management and operation at London Consulting Management Company | LCMC, considers that the reason for the increase in the period of rental contracts is also connected with the growth of competition. "It is more favourable to the proprietor to conclude a long-term contract and guarantee that the offices will not become empty in a couple of months after the premises is put into operation," he notes.
Experts consider that long-term contracts are favourable first of all to large companies renting large areas. Developers are also guided by them. In particular, with an international name and good credit rating the proprietor will give companies discounts and more concessionary terms as it knows that in difficult conditions it is possible to collect the payments stipulated by the rental contract from the head of the company, explains Stobetsky.
In the opinion of Roman Sokov, director of the consulting department at Becar Realty Group Moscow, the important advantage of long-term contracts is that they are signed at fixed rates for the whole term of the agreement. If the rental contract provides for the revision and correction of rental rates during the term of the contract the mechanism of such revisions is registered in the contract, including the date of revision and interest rates. And if a proprietor decides to sell a premises with long-term rental contracts in place, according to the Civil Code the new owner of the building is obliged to rent out the premises to the same tenant under the same conditions as before the contract was terminated by the previous owner, he notes.
In a growing market long-term contracts are more favourable to the tenant, and in a falling market they are more favourable to proprietors, says Pavel Telegin, a leading expert at marketing company Moskovsky Biznes Inkubator (Moscow Business Incubator). Irina Florova, head of the department of research of office premises at CB Richard Ellis considers that one aspect of influence of the international financial crisis may become a decline in the huge demand for office space in Moscow. "Owners would have to give discounts to tenants and offer shorter lengths of contracts," she says.