1 Effects of rental legislation on the office market: A game theoretic analysis. Sigrid Katzler Hans Lind Olof Netzell

2 Background This study is about the difference between the office rent in renewed contracts compared to newly signed leases The procedural rules concerning renewal of rental contracts in Sweden increases the risk for the landlord and makes it rational to accept a rent below the theoretical market rent.

3 General importance Rental regulation affects transparency and liquidity in the rental market Transaction costs in the rental market needs to be analysed systematically Different rental legislation in different countries ought to affect transaction costs, and differences in rental levels

4 The Swedish system In the renewed contract, the landlord is not allowed to demand more than the rent in the open market If the landlord demands a higher rent, the tenant has the right to economic compensation (can sue for damages) The landlord has to inform the tenant about the new rent level nine months in advance

5 Rental Tribunal Mediation when tenants and landlords disagree about rental level Statement about the open market rent If the parties do not come to an agreement, the tenant must move out and can sue for damages

6 Loophole It is mandatory for the tenant to file for mediation to be allowed to sue for damages Possible for tenant to file for mediation and then not show up The landlord gets no possibility to reduce his/her demands

7 Theoretical analysis What if perfect information and no transaction costs? Overview of the uncertainties: Uncertainty about the type of tenant Uncertainty about the current market rent level and how the market rent level will develop Uncertainty about how the tribunal, and the court will act

8 Decision tree (1), general structure

9 Decision tree (2), tenant of type U

10 Decision tree (3), tenant of type S

11 Results from the Swedish Market SFI/IPD data Compare new and renewed contracts Preliminary finding: Rent in new contract 6% higher than renewed contract

12 Further research Quantitative studies Comparison between European countries