Mind the gap: Paris market becoming ever more polarised

The gap between the top and the bottom of the market in Paris is widening in the office sector and other asset classes, experts agreed at Real Asset Media’s France Investment briefing, which took place recently at Taylor Wessing’s headquarters in London.

Serge Bacconnier, deputy head Paris office, Berlin Hyp. Photograph Karla Gowlett

“The market is becoming ever more polarised,” said Serge Bacconnier, deputy head Paris office, Berlin Hyp. “ESG-compliant assets in good locations are maintaining their value, while others are not marketable and difficult to finance.”

In the office sector there is a disconnect between the investment market, which remains subdued, and occupier demand, which keeps growing and is leading to ever-higher rents for prime assets.

“Everyone is refocusing on location,” said Gwendal Kalkofen, managing director, head of real estate finance, Europa. “The top end of the market is where liquidity is, and it’s also where you can attract talent.”

What activity there is in the office sector is focused on prime assets in the best locations.

“Offices haven’t yet found their way back into the market. There have been only six office transactions over 5,000 sq m this year, while there were 16 in the same period last year,” said Alfred Fink, partner, head of real estate, TaylorWessing. “Investment volumes are contracting, but prices are increasing because there are no new projects coming up due to a lack of financing.”

Offices outside in-demand areas like the CBD and La Défense will need to be upgraded to make them ESG-compliant, or repurposed to be turned into resi or logistics assets, otherwise they are at risk of becoming stranded.

“ESG is being taken very seriously in the French market, every stakeholder recognises it as an important issue,” said Bacconnier. “We are happy to finance the conversion from brown to green, as it’s the only way the office sector can come back. Value-add and core plus to improve office assets will be a big topic over the next few years.”

France is racing ahead in innovation and in decarbonising its energy supply and it is seeking to implement EU Taxonomy faster than other countries. The government has put in place a “green” legal framework that covers all assets and will transform the sector.

It represents a real challenge for investors, as they will not be able to let non-compliant buildings. Many 70s and 80s office buildings on the outskirts of Paris could become obsolete in the next decade. Some assets that need refurbishing have already been taken off the market.

“There’s real and increasing pressure to upgrade the quality of buildings, which is bad news in the immediate as it’s costly and complex, but it’s good news over the long term as buildings will be more energy efficient”, said Amandine Joulié, partner, TaylorWessing.

Given the shortage of housing in the city, it would make sense to repurpose obsolete office buildings in B locations into residential. But it’s easier said than done, as the necessary permits are not easy to get. Local authorities prefer the income they get from offices and are reluctant to spend on the necessary infrastructure.

“We need more housing but it’s become a political issue,” said Joulié. “Mayors and urban planning departments are reluctant to allow repurposing from office into resi because they would have to invest in infrastructure, public transport, housing and health.”