São Paulo – The surge in IGP-M, the exacerbation of the epidemic and the economic problems associated with it, have led to discussions about readjustment of lease contracts to the National Congress. Parliamentarians have introduced new bills – and this has sparked an argument between landlords and tenants.
One of them (PL 34/2021) requires extra-judicial renegotiation of backward rents if the situation results from anti-coronavirus measures. Another (PL 838/21) suspends contract modifications for up to three months after the pandemic is overcome – and a third maintains the suspension until December 2022. There is also a project (PL 5327/20) specifying the landlord to create a guarantee fund for the contract guarantor benefit in the event of a tenant default .
Among them all, the proposal that received more attention specifies that readjustment of lease contracts – residential and commercial – cannot exceed the country’s official inflation, which is currently measured by the IPCA (Consumer Price Index), which is computed by IBGE. To apply a higher index, PL 1026/21 states that the tenant will need approval.
Two weeks ago, the House of Representatives approved an emergency order for this project, which means that a date can be set for a vote in the plenary at any time. Faced with this possibility, the tension quickly escalated.
But why IPCA?
Traditionally, leases are adjusted by the IGP-M – or General Market Price Index – which is computed by Fundação Getlio Vargas (FGV). But contrary to what many people think, this is not stipulated in any law or regulation.
In fact, Brazilian law only states what should not be used as a standard in contracts. According to the Leases Act 1991, landlords and tenants are free to determine IndicatorProvided that the amendment is not linked to a change in the minimum wage, the exchange rate or the foreign currency.
“We also advocate free negotiation between the landlord and the tenant,” says the justification of the bill, written by Representative Vinicius Carvalho, “However, these free negotiations must in fact take place, because we know that the tenant will not have the power to reject the proposed index.” In the text, he argues that the IPCA reflects the “true cost of living”.
According to the IGP-M calculation methodology, approximately 60% of the prices that make up the index are wholesale prices and 10% of civil construction prices. Only 30% reflect consumer prices. For this reason, variables such as the dollar bid and commodity price greatly influence the bottom line. Conclusion: In the twelve months ending in March, IGP-M accumulated an increase of more than 31%.
The IPCA is, in turn, designed precisely to reflect the contrast in the average prices of the average consumption basket for Brazilian households. Could they also suffer from a stronger dollar? Yes of course. After all, many everyday products also contain imported ingredients. However, the effect is usually much less.
According to André Prause, Coordinator of the Consumer Price Index (IPC) at the FGV, at the start of the IGP-M’s historical series, the index marched at the same pace as the IPCA, which lasted until 1995. “The market used The IGP-M is a lot because of their general belief and because it’s calculated by Prestigious institution other than the government, ”he explains.
The index was a benchmark of federal government bonds, and acted as a deflator for the gross domestic product (GDP) chain – and it ended up spreading among leases, even as it was also affected by civilian construction prices. “But that was never a trend from FGV. Rent is a very specific item, whose prices are not exposed to the exchange rate, for example,” says Braz.
How have rents behaved in the past year?
The increase in IGP-M over the past year has taken on more dramatic features due to the country’s economic context. The impact of the epidemic on a portion of the population has been the loss of income, making it more difficult to endure the more than 20% adjustments imposed by the IGP-M from the second half of 2020.
In practice, however, according to experts, evidence suggests that the index has not been fully implemented in many cases. This is observed, for example, in price variance specifically for rents within the IPCA. In the past twelve months through March, while the general index indicates inflation of 6.10%, prices in this category increased by 3.06%.
It is a minor part of the IGP-M in the same period. “If this indicator were used, there would be no such difference, from 3% to more than 30%,” Praz says.
Other indicators show a similar movement. The Fipezap Residential Rental Index, for example, recorded a 1.05% increase in rental prices in 12 months. Month after month The number is taking off more and more from IGP-M, To a distance unprecedented in the history series.
“The rent has a very fragmented offer. In many places, those who rent today are paying cheaper than they were a few years ago,” says Danilo Egliore, an economist at DataZap.
One detail: While the rental rates calculated on the IPCA are based on active contracts, including those already in place and which are being adjusted, the FipeZap index starts from the listings of properties for rent – that is, it uses the rates advertised as the reference.
The QuintoAndar rental index takes into account new closed contract prices through digital real estate company QuintoAndar – and in the past 12 months through March, the index recorded a 6.16% decline in values practiced in the city of São Paulo and 1.46% in Rio de Janeiro.
“Everything indicates that the rental market is working and the imposition of a new indicator is to change the winning team,” says Jacques Buchatski, leasing committee coordinator at the Brazilian Institute of Real Estate Law (Ibradim).
Is it necessary to limit re-amendment under the law?
Various rental price indices indicate that, in many cases, landlords and tenants were able to negotiate to avoid excessive adjustments on the one hand, and the opportunity to keep the property occupied on the other hand.
Real estate and management company Lello, from São Paulo, for example, estimates that only 8% of its contracts that were revamped in March actually applied IGP-M. In 29% of the cases the owners chose to use IPCA and in 25% other values were negotiated. Moreover, there was no readjustment in 38% of the contracts.
Since January, Lello has adopted the IPCA as a standard for resetting new residential and commercial leases, following a move QuintoAndar started in November. Since then, with the addition of new and anniversary leases in this period, more than 35% of the platform’s entire contract base already has an IPCA as a reference.
In the past year, one real estate company and the other have created mechanisms to facilitate negotiations between tenants and landlords. “Regardless of the benchmark for readjustment, trading is free and encouraging, whenever interested parties want it,” says José Osse, Communications Director at QuintoAndar. “In general, the landlords realized that the adjustment made by the IGP-M would not be sustainable and preferred to change the index rather than risk losing a tenant and bearing the cost of the property for at least two months.”
For this reason, many experts argue that it makes no sense to place an end to reshuffling of lease contracts. At a time like this, when economic activity is very low, there is room for major negotiations. The property for rent is big and what has prevailed is the agreement, “says Braz, of FGV.” Indexed will not be welcome. “
This does not mean that the experts agree on everything. Jose Roberto Greach Jr., president of the Association for the Management of Real Estate and Residential Complexes (AABIC), also opposes limiting remodeling to a specific index. But it also disagrees with the change, even voluntary, of the IGP-M by the IPCA as a standard. “Regardless of this year’s hiatus, IGP-M reflects the reality of inflation in our lives.”
If the password is negotiation, here’s a tip for resisting tenants: It’s worth revealing the situation, presenting the statements and defending a slight amendment. “In cases where the unit is excessive, with obvious distortions, the tenant has the possibility to file a lawsuit,” says Pochatsky, from Iberadem. Or you can also terminate the contract and move to the adjacent property, as the offer is currently wide.
What happens when rents are regulated?
In practical terms, what does a limitation in rental adjustments such as a proposal being processed in the room mean for tenants, landlords, and the real estate market?
In general, experts see a potential disincentive for this sector. “Public authorities should get involved in the markets when there are specific failures, like there is a large concentration of supply in a few dealerships, for example,” says Igliore, of DataZap, stressing that in Brazil, this is not the case with rents.
“Whoever offers property for rent may be in a better position than a tenant, but they also, as a general rule, need that income. I understand the motivation behind the creation of the IPCA as a reference, but I think the idea of simply stopping remodeling with any indication appears to be a mistake,” he assesses.
For Braz, from FGV, the sector has trading tools and keeping the readjustment indicator open is what ensures market flexibility. “Indexing is never good, and at the moment there is no indicator that allows for a balanced view of the tenant and landlord side,” he says. “In light of the faltering economy and rising unemployment, there will be no room for adjustment.”
Real estate market experience, according to Bushatsky, of Ibradim, indicates that regulation of price adjustments can have at least two consequences. On the other hand, owners who do not have rent as a major source of income may feel discouraged by continuing to invest in this sector. On the other hand, prime rental rates tend to increase to compensate for the restrictions imposed on adjustments during the term of the contracts.
The recent experience in Berlin, Germany, provides evidence of this. In February 2020, a city law went into effect setting a ceiling for rents for properties built before 2014.
Values have been frozen for two years at the same levels as in June 2019. They can only be adjusted again in 2022, but at a maximum rate of 1.3% per annum. In addition, since November 2020, rents in excess of 20% over the fixed housing limit must be reduced.
Effects, according to the agency The German WaveIt was not good. The owners have withdrawn their properties from the market, reducing supply in the city by more than 50% in a few months, hoping to cancel the rule – which actually happened last Thursday (15). The Federal Constitutional Court in Germany annulled the law because it was found to be unconstitutional.
There are differences between the German and Brazilian markets, of course. The laws, rules and norms are different. In the case of Berlin, specifically, Pochatski cites the greater speed in virtual eviction measures and the growth of short-term rentals by platforms like Airbnb, which have generally led to higher prices in recent years. However, experience warns of talking points.