Investors are scrambling to find opportunities in the French logistics sector because they know that prospects are positive, experts agreed at at Garbe’s Investment Briefing – France: Real Estate Outlook 2023, which took place yesterday on Real Asset Media’s REALX.Global platform.
“Now it’s a good time to enter the French market because yields will stabilise or fall and rental levels will go up,” said Michaël Vidamant, managing director France, Garbe. “There’s a race among players to find space and we believe strong competition for assets will push yields lower, while lack of supply will inevitably lead to rental growth.”
The players in the race are mainly international companies, as French investors only represent around 25% of the market. Such levels of interest have pushed the segment’s market share to 20% of total CRE investments, which rises to 25% if light industrial is included.
In 2022 logistics investment volume was €4.9 billion, a slight drop from 2021 which was a record year. Take-up was 4.1 million sq m, well above the ten-year average of 3.6 million.
“The figures show that despite an economically and politically difficult context, the French logistics market remains resilient,” Vidamant said. “Logistics is now a well-established asset class in France and foreign investors are clearly very interested, partly because rental values are lower than in other European countries and investors are betting on rents going up.”
Strong take-up, limited supply and a complex development process are pushing both prime and non-prime rents up. Rents in France have increased by 31% since 2000, but the upward trend has amplified since 2020 and is expected to accelerate further and catch up with other European countries.
Moreover, increase financing costs and construction costs have slowed down or halted the development of new projects, adding further pressure on the market.
“Asset managers and development companies facing higher construction costs and higher financing costs have no choice but to put up rent, it’s the only option if they want to recoup their investment,” said Vidamant. “They will opt for aggressive letting strategies to capture value and margin in a rising cap rates environment.”
Due to the interest rate adjustments and the associated change in financing conditions for project developments and investments, since the second half of 2022 there’s been a significant decompression of yields in the European logistics market. “We believe this re-pricing phase creates new opportunities that should bring capital back before the end of the year,” Vidamant said.
In France take-up is not expected to increase this year. “This is because of shortage of supply rather than lack of demand,” said Vidamant. “It is difficult to build up a large platform. Speculative developments are difficult in the current economic turmoil, despite their commercial success.”
Vacancy rates have dropped, as has been the case in most European markets. In France demand is such that they are at record lows for both Grade A and Grade B assets.
Another factor is that most of the supply that is available is Grade B and does not meet users’ expectations. The flip side to the lack of quality stock is that there’s a great opportunity to invest in improving and upgrading existing assets, provided they are in a strategic location.
“Given the shortage of new Grade A product, we can help investors to secure buildings, even on a short-term lease, upgrade them and benefit from the rental increase,” said Vidamant. “A well-located asset can be refurbished and put on the market at a very attractive rent.”
An added bonus is the opportunity to make assets sustainable, meeting investors’ growing demand for ESG-compliant buildings, and also reduce energy consumption by adding solar panels on the roof.
“A capex programme will benefit the building and it will be good for tenants, for investors and for the planet,” he said. “It’s a win-win situation.”