Paris's 'dangerous' rent cap seen deterring home investors

[PARIS] President Francois Hollande's plan to cap rents on new home leases in Paris will deter real estate investors while benefiting the wealthiest tenants and hurting the poorest, according to brokers.

The proposal will limit rents in the French capital to 20 per cent above and 30 per cent below a neighborhood's average, the government said June 12. The system, based on apartment size, year of construction and location, will allow surcharges for luxury homes.

The mechanism is "dangerous because the framework is deterring investors who, faced with the lack of freedom, will chose other investments," Jean-Francois Buet, chairman of FNAIM, France's largest residential property-broker federation, said in a statement Monday.

About one in five of the 80,000 new leases signed in Paris each year may be capped, according to Observatoire des Loyers de l'Agglomeration Parisienne, the association mandated by the government to compile Paris rents. Of these, a third will drop by less than 50 euros per month, a third by 50 euros to 100 euros, and the rest by more than 100 euros, according to OLAP.

"It's a strong step for social justice as rents have climbed by 42 per cent in the capital over the past 10 years," said Sandrine Rousseau, a spokeswoman for Europe Ecologie-Les Verts, France's main environmental party. The party has called for the cap to be extended to all cities that face a "tight" housing market.

The regulations, to be introduced Aug 1, will slow renovation works by apartment owners and increase litigation between landlords and tenants, according to Foncia, the residential property manager controlled by private-equity firms Eurazeo SA and Bridgepoint Advisers Ltd.

"The most expensive rents will probably drop, but still won't be occupied by modest-income earners," Foncia Chairman Francois Davy said in a June 12 statement. "An apartment rented for 10,000 euros per month in a fancy neighborhood will drop by 30 per cent, while in more working class areas, an extremely low rent risks climbing 10 per cent on average."

The cap may hurt landlords who have borrowed to buy Parisian homes and its complexity may deter buy-to-let investors, said Frederic Verdavaine, property manager Nexity SA's head of real estate services to individuals.

"When it's complex, investors shift to distrust mode," he said.

BLOOMBERG