It is too early to invest in offices in Greater Paris so stay defensive: this is the advice of Barclays’ analysts in a report published by the bank yesterday.
The recent round of annual results demonstrates few signs of improvement in the sector yet, according to Barclays. They show declining NAVs as office valuation softens and the 8% decline in La Défense is described as “severe enough to be memorable”.
The report predicts that the year ahead will bring only muted growth because of two factors.
The first is the impact of disposals: most companies entered the Covid-19 crisis with an LTV they no longer deemed tolerable at his stage of the cycle. The second is a prolonged wait-and-see market, which means a slower de-risking of developments through pre-lettings and more risks to the downside on occupancy.
“The average 1% like-for-like office value decline in 2020 is nowhere near the implied discounts to assets,” said the report. “But instead of finding comfort in the resilient past results, we advise investors to stay defensive as we wait for signs of market improvement, which will likely be paired with an economic and confidence recovery.”
Greater Paris office deal volumes and valuations dip
Despite the liquidity in the Greater Paris office market, transaction volumes declined and valuations fell in 2020. There was, what the report called, a “flight to centrality”, as the CBD was resilient while La Défense suffered the most. Overall, the Greater Paris office valuation averaged -1%, but the fall was mitigated by companies’ diversified profiles.
Among the major listed companies, Barclays retains a relative preference for Gecina over Covivio and Icade, but the bank is keen to emphasise that “all companies will be trading in a challenging environment this year”.
Barclays is still “overweight” on Gecina because of its high quality office portfolio and strong balance sheet, but predicts its “total return strategy will be more challenging to pursue in a flat-to-declining market, as the development pipeline is more difficult to de-risk and impacts the earnings progression, while occupancy losses loom.”
Barclays is, however, “underweight” on Covivio as the company goes through its deleveraging and expects more downside potential for offices and a slower recovery for its hotel portfolio.
“Underweight” is the label for Icade as well, because of its high exposure to French offices submarkets with current and future high availability, which could weigh on their pricing power.