Incentives and effective rent

Landlord concessions such as rent-free periods or fit-out contributions that reduce the actual rent.

The headline rent in the lease can differ from the rent paid in economic terms if landlords grant rent-free months or relocation or fit-out contributions. The effective rent spreads these concessions arithmetically over the term. In weaker markets, incentives increase without headline rents falling.

Calculation

An example: with a headline rent of 6.50 euros per square metre, a five-year term and six rent-free months, the effective rent is around 5.85 euros. Fit-out contributions are likewise spread over the term.

Valuation

Valuers and investors look at effective rent because it reflects economic income. High incentives with unchanged headline rents support valuations in the short term but obscure the actual rent level.

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