INDICES AND MARKET VALUES

ICC (Construction Cost Context)

Presentation

The Construction Cost Index (ICC) is a quarterly index, referenced at 100 when it was created in the fourth quarter of 1953. The ICC measures developments in the construction cost of new buildings destined for non community housing in mainland France. It is published in the Journal Official towards the middle of the fourth month following the quarter under review. It is calculated by the INSEE in collaboration with the French Ministry of Ecology, Energy, Sustainable Development, and the Sea.
Although time-honored, "construction cost index" is a misnomer as it is in fact a price index based on the observation of construction contracts entered into between project owners and construction companies and excludes any other components affecting housing construction costs (charges upon land, additional marketing costs, financing costs, etc.). The cost of construction itself is apprehended by other indicators such as the "BT index" calculated monthly by the Ministry of Ecology, Energy, Sustainable Development, and the Sea in collaboration with the French Building Federation (FFB).

Calculation method

A price index measures price trends. Such an objective implies isolating pure price changes, discarding any effect related to changes in the content of the products in question, for example, higher housing costs following the increase in room size or the installation of more advanced equipment. In most cases, indices are developed as follows: the current value of an intangible sample of articles is noted and compared with its value at a reference date. When an article is replaced by a different model, a "quality effect" is assessed, i.e. the impact this change has on the new price. A pure price change can therefore be determined by deducting the quality effect.
The difficulty in construction is that each building is unique. Therefore, an identical structure cannot be compared at different periods in time. This means that a price change measure cannot be based on just an observation of prices and blurs the perception of inflation in the construction industry. Indeed, prices discussed here depend on a large number of parameters: building configuration, materials used, equipment installed, site constraints, works location and scale, nature of relationships between stakeholders (promoters, house builders, general contractors, subcontractors, and project owners), schedule, and contract circumstances. The calculation method must be adapted to these characteristics.
ICC (cont.)
The hedonic method uses an econometric model to establish a relationship between construction market price and the nature of the work allowing the inherent value of these different characteristics (e.g. size, number of storeys, comfort level, geographic location, and living standards on the construction location) to be assessed. The temporal evolution of prices is captured in the model using dummy variables for the date. The INSEE already uses this method, in particular for the existing-home price index. It ensures that developments in housing quality are taken into account.
The scope of the ICC is very broad. It includes three major residential construction types: purely individual, the grouped individual (multi-dwelling building or single family housing with rooms), and multiple housing. To account for construction heterogeneity, a hedonic model is defined for each construction type. Model coefficients are recalculated every quarter and the models themselves are regularly reviewed. The hedonic ICC for all new housing results from aggregating the three sub-indices in proportion to the significance of each construction type.
The ICC calculation is based on data from the statistical survey on "the Construction Cost Index and New Housing Construction Costs" (ICC-PRLN) carried out by the Ministry of Ecology, Energy, Sustainable Development, and the Sea. This survey allows us to trace construction price trends by monitoring 500 cases which represent 7,000 to 8,000 new homes depending on the quarter.

Construction Cost Index Values

Base 100 as at Quarter 4, 1953

IRL (Rent Reference Index)

Annual adjustment calculation

Reread your lease agreement carefully. You should find a clause providing rent review conditions. Take note of the quarter to use for the review. If the contract's review clause does not provide a reference quarter to use refer to "that corresponding to the last index published on the date the lease was signed".

Example

A lease signed on March 1^st, 2010 for a monthly rent of 500 Euros, reviewed annually on the lease's anniversary date. The quarter to use (in the absence of special provisions) is the last quarter published on the date the lease was signed, i.e. Quarter 4, 2009. The data required for this calculation is available on our website:

Rent Reference Index (IRL) - reference 100 as at quarter 4,1998

The first rent review will take place on March 1^st, 2011. The Rent Review Index as at Quarter 4, 2010 is equal to 119.17. It has increased by 1.45% since Quarter 4, 2009 which had an index of 117.47.

The new rent will be at most equal to:

                            The quarter's Rent Reference Index
Previous Rent   x  ------------------------------------------------------------------------- =   New Rent
                            Rent Reference Index for the same quarter of the previous year

ILAT (Tertiary Activities Rent Index)

After being invalidated by the Constitutional Council twice, the introduction of the ILAT (rent review index developed from practice) is due to the Law of May 17^th, 2011 (A&C Immobilier, Year 7, no. 6, p. 4, 13.05.2011). However, the law left the rules for this new index (composition, formula, scope...) to be set by decree. The Decree was published in the JO of December 12^th, 2011.

What type of rent is concerned by it ? The Decree specifies that the ILAT's scope is limited to tertiary activities other than commercial and craft activities for which the Commercial Rent Index (ILC) can already be used (Monetary and Financial Code, Art. D.112-2). Logistic warehouses and Office space (liberal professions) are particularly targeted by this. Note that the Decree confirmed, by a text edit, that only the ILC (and not the ILAT) can be used for a pure craft activity.

In practice ? If the lease is concerned, the ILAT can now be legally included in any new lease (business, commercial, common law contract) as the Reference Index to be used for rent review including through an indexation or appropriate sliding scale clause. Here, it is just an option as is the ILC. Using the ILAT requires the agreement of both the lessee and lessor. Therefore, the lessee cannot state that the ILAT was made mandatory. However, landlords may continue to request that their leases refer to the construction cost index (ICC) for the rent review as before.

Advice. As for the ILC or IRL (accommodation), the INSEE (https://www.insee.fr) sets the value of the ILAT every quarter using the calculation method provided by the Decree. The first index published by the INSEE was set on January 6^th, 2011 at 103.64 (for Quarter 3, 2011). This can be used in future leases pending the next publication planned for April 6^th, 2012 (for Q4, 2011").

NB : The ILAT is now an optional alternative to the ICC for tertiary (re)leasing (offices, warehouses...) where the ILC cannot be used.

ILC

For Rent Adjustment... A Decree dated November 4^th, 2008 (JO of November 6^th) set the regulatory framework for this new commercial lease quarterly index legalized by the Law on the Modernisation of the Economy (LME).

Calculation method. The ILC is constituted by the weighted sum of indices published by the INSEE, averaged out and representative of trends in consumer and construction prices and trade turnover (TO). Specifically, Construction Cost Indices (ICC) and retail trade TO adjusted to seasonal variations and working days are taken into account for 25%. The Consumer Price Index excluding tobacco and rent (IPLC) is used for 50%.

Activities concerned by the ILC. While one might expect it to be confined to certain sectors of activity, the ILC can be used for any "commercial activity including those exercised by craftsmen" (Monetary and Financial Code new Article D.112-2). However, commercial activities exercised in office space (including logistic platforms) and industrial premises are expressly excluded from using this index.

ILC applicability. Remember that using the ILC instead of the ICC to review rent price at the end of every three year period and setting the new rent price limit on lease renewal is not "legally" required. This must be negotiated between lessor and lessee for future leases. For existing leases a written addendum stipulating that the ILC will be used instead of the ICC must be provided. The lessee must also have agreed to this.

Using the ILC. The INSEE published ILC "reference" data on November 10^th, 2008, which is very useful to correctly apply this new index. 
This information and an explanatory guide are posted on https://immobilier.indicator.fr, ref. IO 04.17.01.

Advice. The ILC is, in principle, "favorable" to lessees, we repeat that no initiative should be taken without formal written agreement from your principals/lessors if you are ABD.

ILC (cont.)

The ILC concerns all merchants and craftsmen-merchants. See our appendix for the INSEE "references" if you choose the ILC.

Commercial Rent Index Values - 2011

BT01 Index

The Construction Professional Index is used to calculate the increase in a building's construction price.

The French building construction price index (BT01) has been used to review building construction contract prices in mainland France since 1974. It is published in the Journal Officiel every month. 
About 40 indices represent specialty works but only the BT01 covers all construction work activities.

Commercial real-estate market values
 Vaucluse and Northern Bouches-du-Rhône