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French market rebounds after tough first half

Unibail Rodamco Westfield’s 46,000 sq m SHIFT Paris development. The scheme, in the Issy-les-Moulineaux district, has been conceived to encourage collaboration

Overseas capital dries up, but France remains a top three investment destination for investors. Nicol Dynes reports.

The French market took a hit when the coronavirus pandemic struck, but it has bounced back from a sharp drop in Q2 and prospects appear bright. 

The market is moving in the right direction, but it will nonetheless be a steep climb back, says Laurence Bouard, directrice études et recherche at Colliers International France. “GDP is not expected to return to its previous 2019 levels until 2022 and it’s still not clear what the impact of the government’s €100 billion economic support plan will be. As we know, the real estate cycle is strictly correlated to economic growth.”

Office take-up in the Paris region declined by 40% year-on-year in H1, while recently released Q3 figures show a 36% decline. Total take-up in 2020 is expected to be 1.3 million sq m, compared to 2.4 million sq m in 2019, according to Colliers.

Investments were less badly hit, declining by 27% in the first nine months of the year. In Paris, investments reached €13 billion in the year to the end of September, while the regional cities performed better than the capital, with Lyon and Lille attracting the most interest.

Allianz Real Estate announced in September that it was paying €500 million for two buildings in the Citylights complex, Boulogne-Billancourt, in western Paris


At the start of the year there was optimism in the market, as 2019 was a record year for foreign investments, which increased by 11% on 2018. The pandemic has changed that, bringing domestic capital to the fore. “Investors are mainly domestic now and they are being more selective, focusing on core products,”  says Bouard. 

“Physical constraints and restrictions on travel mean that domestic investors are winning the day,” adds Andy Watson, partner at Europa Capital. “Foreign investors are on hold, including our parent company Mitsubishi. It’s been a real change from last year, when La Défense was full of Korean money.”

Whatever the present difficulties, France remains in the top three investment destinations in Europe after Germany and the UK and still has some of the highest prime rents and lowest yields, points out Bouard. 

Foreign investors will be back, says Guillaume Turcas, managing partner at Faro Capital Partners: “Paris is and will continue to be a must-stop in Europe, along with Greater London and the top German cities.”

Declining demand for offices

Offices remain the backbone of the French market and the favourite destination for investors’ capital. In Paris they accounted for 74% of all investments in Q1-Q3 2020, the same figure as in 2019. In France as a whole investments have declined only slightly, from 59% to 56%, according to Colliers International figures.

But demand for space has declined significantly this year because of Covid-19. “Corporates are downsizing and their first move is reducing their office footprint,” says Thomas Brault, senior director, capital markets, at Colliers International.

‘There is a lot of La Défense-bashing going on now, but I believe it’s a great long-term opportunity, because one day there will be a vaccine and this epidemic will be over.’

Thomas Brault, Colliers International

There are huge disparities in the office market, as some areas are oversupplied. The vacancy rate is 2.9% in Central Paris and expected to stay at low levels, while in areas like the Western Crescent it rises to 10.9%. In La Défense, Paris’s shiny new CBD, a sharp increase in vacancies is expected from the current 5.5% due to the delivery of many new buildings at a time when demand is dwindling. 

“Rental pricing is a function of supply and demand, and La Défense is at the epicentre of the problem,” says Europa’s Watson. “Next year we expect downward pressure on the market.”

Resi set for take-off

Where some see a problem, others see an opportunity to invest. “There is a lot of La Défense-bashing going on now, but I believe it’s a great long-term opportunity, because one day there will be a vaccine and this epidemic will be over,” says Brault.

While the commercial sector struggles to return to normal, however, many investors are betting more on residential, which is seen as a defensive play. “The residential sector has seen a noticeable breakthrough and strong growth this year,” notes Bouard. “It is seen by investors as a strong diversification play. We have seen more transactions and a lot of diversity, from student housing to senior living.”

Residential has increased its share of total investments in France to 14% in Q1-Q3 2020, up from 8% in 2019. In Paris the percentage has risen from 7% to 8%. “We see residential as a key area of growth in Paris,” says Renaud Jézéquel, general manager, Paris branch, at Helaba. ‘Of our €3 billion loans, only 1% is for resi in Paris, but we want to increase our exposure to residential to 10%, as we do in Germany.”

Value-add on hold 

Banks are tightening the purse strings during the crisis, but good projects can still get financing. 

“Banks are being shy and senior financing is really hard to get,” explains Turcas. “Value-add projects are a bit on hold because of the financing issue and must rely on alternative lenders, not even debt funds but hedge funds.”

The lack of financing is having an impact on valuations. While there has been no repricing of quality assets in good areas, prices in less desirable areas have declined by anything from 5% to 20%. 

“It all depends on product types,” says Watson. “On value-add, as financing is either non-existent or expensive, prices have fallen by 20%, but Central Paris core has seen no change in pricing because rents are holding up.”

Property floats on a sea of debt, as the saying goes, and at the moment government support schemes are keeping water levels high, Watson adds: “When that support drains away, then we’ll see the true situation.”

Banks focus on core

In difficult times banks opt for caution and focus on core clients. “We’re focused on core and core-plus, we don’t do spec, development or value-add financing anymore,” says Jézéquel. “Most of our direct competitors have done the same.”

‘Lenders focus on quality and resilience. Strategic real estate will get financing, even for value-add.’

Renaud Jézéquel, Helaba

The strategy allows for flexibility, though, he adds: “We’ve just financed One Monceau, a well-located quality office building with a strong spec component, a sale-and-leaseback by ABN Amro. In future we might do more value-add and less conservative stuff.” Debt funds will look at opportunistic deals “until banks decide to go into that space as well”.

Good projects will always find backers, Jézéquel says: “Lenders focus on quality and resilience. Strategic real estate will get financing, even for value-add. It’s the alternative asset classes like hospitality that are for specialist lenders only.”

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