By Sylvie Bergeret, Manager at MKG Consulting, on new regulations and new products, at the Paris Asset Forum >hospitality.
The objective of IFRS 16 is to standardize the accounting treatment of owner and tenant companies by reintegrating all leases and contracts that give rise to leases into the balance sheet. There is no distinction between operating leases and finance leases, and leases of more than 12 months are concerned, for asset values that exceed €5,000. So today, it mainly concerns buildings, which account for about 80% of all rental contracts, vehicle fleets, and for some, it will also be construction, transport and other vehicles.
The idea is pretty simple: it consists of reintegrating a new understanding, a new value into the balance sheet, which is "the right of use", which we will reintegrate into the asset. This "right of use" is calculated as the present value as well as all certain contracts, certain rents that will be repaid during the period, from which depreciation is deducted, and opposite, a "rent debt" is included, which will be the discounted value of the rents over the period, to which are added the interest related to this contract, and from which are deducted the rents that are paid over the period.
In the income statement, this leads to a breakdown of rents between depreciation and financial charges. Overall, this leads to an increase in debt, the share of corporate debt, which will have a positive impact on all flows related to operations, and a negative impact on all those related to financial flows. What we can see in terms of impact today is that we need to change the valuation methods, or integrate this notion of valuation, the so-called "right of use" is complex to estimate, taking into account the duration of these contracts, not the duration as it is signed today, but to take into account the probability of renewal or interruption of these contracts and the related charges.
The main point, apart from having a significantly increased share of debt for companies, is that it encourages them to restructure the contracts in each of these companies to adjust and reduce this share eventually. We saw it in the hotel business in 2019 with an offer that has been completely restructured. Hotel rents now represent 3% of the fleet, compared to 12% last year, so there is a significant impact. This leaves opportunities for reducing useful lives, particularly for offices and co-working solutions, since IFRS 16 applies to lease terms of more than 12 months. There are therefore opportunities to optimize for all lower lease terms.
Beyond these purely accounting concepts, regulation is involved in all development projects. Customer expectations are what lead to new products, with the integration of design, digital and eco-responsibility into new projects. These expectations have thus led to the creation of new, more hybrid properties, which gives some space to co-working, F&B and being open to the outside world. This is something that local authorities have well integrated, since once they have emerged from the French notions of "CDEC", "PLU" (local planning rules), possibly hotel schemes, where developments are constrained. They now want to take control of this development, based on properties that share new ideas and innovation.
We have seen "Ré-inventer Paris", the Seine, Le Havre, the metropolis - even Montreal, flourish. Toulouse has innovated a little bit since it just had to be designed. Many of these competitions include components that are important, particularly in terms of environment friendly labels that flourish, with different involvement levels, depending on construction and operation. We also see expectations in terms of innovative properties, flagship properties, particularly towers, high-rise buildings, which have implications in terms of both construction and operating costs.
Another important element is the issue of mobility, since having local planning rules means having to build a certain number of parking spaces per number of rooms created, while we know that expectations and mobility are changing today, with the development of secure public transport such as trams, but also electric bicycles, scooters, carpooling, car sharing, and applications that make all this mobility more and more efficient. The question is therefore to know if today the car parks that are being built or are in the pipeline and set to open within the next 3 years, in 5, 6, or 10 years from now, will we find these new car parks empty? That's the question.
In France, we like to fit everything into boxes. On the one hand, we have properties that are increasingly hybrid, with hotels that tend to be hostels; we also have the notion of co-living that enters the subject; on this point, we can add everything that is on the periphery, outdoor hotels, student residences, senior residences, which meet the same expectations. Besides that, we still have difficulties classifying these hybrid establishments, since a hybrid property that is both residence and hotel, dormitory and hotel, cannot be classified according to the hotel classification as it is. There are thus needs for explanation and regulatory evolution to meet these new expectations.
Fortunately, this evolution is happening despite everything, since the Elan law dating from 2018, which leaves a lot of room for diversity, allows to structure co-living, and allows everything that is conversion from office to hotel. So this leaves new impetus for the development of new concepts. Once again, there is an adequacy between the regulations and the expectations of consumers, investors and operators. A way forward!