Resilient France expects pick-up in H2 and rebound in 2025

The French market has outperformed most of Europe and is going through a transition year before the expected rebound in 2025, delegates heard at Real Asset Media’s Trends 2024: France Investment Briefing, which took place recently at Taylor Wessing’s offices in London.

“We’re likely to see more activity in H2, but caution will still prevail,” said Mike Barnes, associate dDirector European research, Savills. “The big pick-up will happen next year. The first interest rate cut will provide the green light for investors to act. We see US private equity companies already poised to return.”

For real estate it is likely to be a transition year after a resilient performance in 2023. French investment transaction volumes fell by 44% to €15 billion compared to the 10-year annual average of €28.3 billion, yet France did much better than most European countries. In a difficult market for everyone, only Portugal, Spain and Czech Republic outperformed France.

High interest rates and inflation were the main factors affecting real estate investments last year, which points to a rebound in the market later this year. As inflation, which is already falling, returns to its 2% target, interest rate reductions are expected to gather pace in the second half of the year and transactions should start to pick up.

France has a lot in its favour, said Barnes: “It is more resilient because it has a strong domestic investor base and is less dependent on cross-border flows. Also, at a time of global turmoil, geopolitical risk is less of a factor.”

This is an important year for France’s capital, as the 2024 Olympics are expected to provide a €10 billion boost to the city, while the Grand Paris infrastructure project will deliver 68 new stations, connect neighbourhoods to the centre and support new investment opportunities.

Investors’ preferences are definitely skewed towards residential and logistics, but the office sector still has an important role to play in Paris for various reasons, Barnes emphasised.

“Paris offices remain attractively priced compared to European counterparts and, given rental growth prospects, there’s a strong narrative there,” he said. “It also has among the highest occupancy rates on the global stage, well above the European average.”

Demand for high-quality, ESG-compliant offices in good locations remains extremely strong. Even in 2023, office take-up in the CBD was higher than in pre-pandemic years. In Europe, only Oslo, Lisbon and Milan performed better.

Office vacancy rates in the Paris CBD are the lowest in Europe and, as there is a limited development pipeline, demand will continue to outstrip supply.

Such concentration of demand is leading to a polarisation of the market between high-quality assets and the rest. “There is a real bifurcation between prime and secondary assets,” he said. “We definitely see a premium emerge for ESG-compliant assets. Across Europe, the yield spread between  BREEAM/LEED certified and average offices has reached its highest level on record.”