Domestic investors ensure French market keeps ticking amid crisis

Adobe Stock/Augustin Lazaroiu

A rebound is expected later this year as investors shrug off 2020 results.

Describing the last 12 months in French real estate markets, Cyril Robert, head of research, France, at Savills, says: “2020 results are not as bad as feared, which is a positive surprise and shows the resilience of the French market. Investment volumes were down, but still 14% above the 10-year average, which is remarkable, considering the situation.”

Lack of supply in Paris and the increased presence of domestic investors are two reasons why 2020 was not as bad as it might have been for French real estate.

Total volume for the year was €28.5 billion, a 33% drop compared to 2019’s all-time high of €42.5 billion, but higher than expected. After the sudden halt in Q2 2020, the French market picked up again and accelerated in Q4.


“The second lockdown had a less severe impact than the first one,” says Robert. “What is noticeable is that valuation differences have strengthened.”

The Paris region remained dominant, accounting for 66% of volumes, but 2020 saw the consolidation of a trend towards alternative locations. Volumes declined by 37% in Paris, but by only 27% in the regions. There was also strong interest in national portfolios, with investments of €5.3 billion in the year.

“Local capital is well aware of the opportunities the regions can offer,” says Robert. “Domestic investors have regained their position in the French market, increasing their share from 56% to 68% in one year.”

Overseas capital 

Some international investors have also been active. German and North American investors actually increased their activity in 2020, notes Robert, to 13% and 11% of the total respectively. “We’ve seen an interesting dynamism from Canadian investors, while Asia-Pacific capital has virtually disappeared, but that was expected even before the pandemic hit.”

The performance of Paris offices, which traditionally dominate the market, was the worst in 20 years, with a 29% drop in investments to €18.5 billion. Take-up was just 1.3 million sq m. The vacancy rate rose from 5% to 6.8% in one year.

“The well-located office assets are still perceived as a low-risk investment, despite the deterioration of the rental market,” says Robert. “Prime yields have moved from 2.9% to 2.75%, which shows the interest of investors in core office assets. The problem is lack of opportunities.”

Investments in offices have decreased because capital wanted to diversify into different sectors. “Logistics and residential have been favoured by institutions, but the problem is limited supply,” explains Ken Baccam, director, research & strategy, at AEW. “But the Paris office market remains strong, ahead of not just London but also New York, Tokyo and Seoul. I am still a believer.” 

Opportunities in value-add 

The pandemic-induced crisis has created opportunities in value-add. “There are plenty of opportunities in the value-add segment,” comments Jarek Morawski, executive director, strategy & research, at Grosvenor. “In a crisis investors always flock to core, but there’s plenty of obsolete assets that can be brought up to standard, not just in the CBD but in the suburbs also. Paris is a very attractive place to invest.”

The average life of a building is 30 years, so every year 3-4% of office stock has to be re-evaluated, which means 1.5-2 million sq m of assets need to be repositioned every year.

“There’s a huge pipeline of opportunities for value-add investors as many older offices will be vacated this year,” says Raphael Tréguier, founder and managing partner of Kareg Investment Management. “Repurposing old office stock will be one of the key themes of 2021.” 

Delayed projects 

Kareg has found that around a third of value-add opportunities are postponed because of administrative delays, while a quarter are abandoned due to the costs associated with mandatory social housing requirements, which in some areas impose sales at half the market price.

‘We do finance value-add in the very best locations and the green aspect has become increasingly important, it’s a must-have now.’

Serge Bacconnier, Berlin Hyp

“There’s a lot of risk attached to these projects, but also a strong willingness to invest,” says Tréguier. “We need more players to educate all stakeholders, including local authorities, so that we can embrace the risks and find the skills required.” 

Financing is not a hurdle, especially if its purpose is to improve the green credentials of good assets. Repurposing involves bringing buildings in line with ESG regulations and sustainability criteria.

“We do finance value-add in the very best locations and the green aspect has become increasingly important, it’s a must-have now,” says Serge Bacconnier, deputy head Paris office, at Berlin Hyp. “We were among the first issuers of green bonds in Germany and we want to increase the share of sustainable assets in our portfolio.”

Overall, there is a strong sense among experts that the market has the capital and the will to rally as soon as the pandemic is brought under control. 

“We are now in our third round of lockdowns but the vaccines give some hope,” says Morawski. “Our expectation is that by summer we’ll be out of the crisis and we expect a strong bounce back in the French market.”

Green residential emerges as a key theme 

At La Maillerie in Lille, Nhood transformed a brownfield site into a mixed-use neighbourhood

Residential and ‘green’ are the two main trends of the year ahead in France. 

“Residential in all its different forms is the future, there’s a real change in how people want to live, and green and sustainable is the new definition of quality,” says Etienne Dupuy, CEO of mixed real estate operator Nhood.

The green theme is developing fast, as regulators are dealing with climate change risk, tenants demand sustainable and healthy buildings to live and work in and investors are coming to the conclusion that it is money well invested.

New schemes without an ESG element are unthinkable now, adds Dupuy: “At Nhood we’re pushing the boundaries, reinventing the city, creating mixed-use districts and putting nature in the mix, even urban farming.”

‘We’re pushing the boundaries, reinventing the city, creating mixed-use districts and putting nature in the mix.’

Etienne Dupuy, Nhood

There is a lack of supply in every residential segment, from PRS to affordable housing, student housing to senior living. The supply and demand mismatch is why even traditionally conservative lenders are looking favourably at the residential sector.

“Banks are cautious and tend to focus on the main sectors like office or logistics, but we’d really like to add residential, because there’s real momentum in the sector,” says Berlin Hyp’s Serge Bacconnier. “We’ll continue to lend and I am optimistic about Paris, it’s such a large and deep market and offers plenty of opportunities.”

Senior housing trend on the up 

One sector that is seeing huge growth in demand in France is senior housing. 

Frédéric Dib: “Need for senior housing”

“There’s a great need for senior housing development, especially in the big cities that lack capacity,” says Frédéric Dib, CEO of Mozaic Asset Management. “The shortage has deepened because many projects have slowed down during the pandemic. There may be a drop in volumes because of this, but the trend is definitely up. There will be a strong push in this sector.”

French investors are dominant in the senior housing sector, but foreign capital is also beginning to show interest, adds Dib. 

“We’re seeing many German and Scandinavian investors and also from the Middle East, which was a surprise, and Asia,” he says. “Part of the reason has been the need to diversify. A small shift from the large office market to senior housing makes a really big difference to our small sector.”