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France Capital Markets Group Snapshot Q2 2009
10 Jul, 2009,
FRANCE CAPITAL MARKETS SNAPSHOT Q2 2009
THE LACK OF FUNDING HAS LED TO A FALL IN BOTH INVESTMENT VOLUMES AND TRANSACTIONS
In the first half of 2009, a total investment volume of €2.6 billion was invested on the French property market (including owner-occupier sales), representing a 63% fall over the course of one year. 187 transactions have been recorded since the beginning of the year, in comparison with 249 in the first six months of 2008 i.e. a 25% fall.
After a sharp drop in volumes invested in the first three months of the year, the investment market managed to pick up slightly in the second quarter. Investment activity, which is likely to continue to improve over the course of the next half year period, remains poor due to the lack of financing: banks, ever-more vigilant in their selection process, rarely grant loans for more than €40 million, which has led to the evaporation of large-sized transactions, limiting in turn the amounts invested. Along with the almost complete disappearance of large-scale transactions (of over €100 million), the average deal size has fallen considerably and now stands at just €15 million, compared with €30 million at the end of the first half year of 2008. 12 transactions of more than €40 million were recorded, four of which were over €100 million and two of which were over €200 million. Small and medium sized transactions of between €15-40 million have been much more frequent as they still benefit from relative ease of financing and are sought after by equity investors. Assets in a good location offering secure income are the most liquid. On the other hand, secondary buildings and large-scale schemes have decreased in value.
ILE DE FRANCE AND OFFICES HAVE BEEN THE MOST AFFECTED
The Paris region remains the most popular destination for investors in France, totalling 56% of investment activity. However, only €1.5 billion were invested in Ile-de-France: this compares to €4.6 billion in the same period last year, which represents a sharp fall of 67%. The provinces, where €1.1 billion were invested, represent 44% of investments in France. This figure results from three major transactions (Casino/Mercialys portfolio, Le 31 shopping centre in Lille and the acquisition of immeubles d’exploitation by France Telecom). If we exclude these three deals, the situation is more stark: all regions have been affected by the lack of transactions.
In terms of asset class, offices have been the most affected with a 75% fall compared to the first half of 2008, representing 55% of market share. Retail remains an attractive asset class and has become accessible to all players. Retail has gained momentum and now makes up for 34% of the €2.6 billion invested in France. The year to date figure is therefore up by 180% although retail investment in the 1st half of 2008 was particularly low. This figure has been pushed up by the sale of three large-sized deals (Casino/Mercialys portfolio, Le 31 and the mixed use building Les Trois Quartiers/21 Madeleine in Paris). The industrial sector is down heavily: just €280 million of industrial property has been bought or sold in France in the first six months of 2009, i.e. down by 48%, representing just 11% of all investments in France. Within the current economic climate, investors tend to adopt wait-and-see attitudes and will only position themselves on new, quality assets.
EQUITY PLAYERS LEAD THE WAY
Foreign investors and mainly German funds, private investors and international fund managers, have made a comeback. Their market share has increased, as they contributed the most to the largest transactions in the 2nd quarter and the upward shift in yields has rendered the French market more attractive to international investors. The most active foreign players are the Germans, who account for 12% of the total investment volume, followed by the Australians (MGPA) with 8% (admittedly with one large deal), then by mainly British, Swiss and Middle Eastern investors in lower proportions. Major Anglo-Saxon investors who concentrate on large-scale schemes, heavily reliant on financing are still absent in terms of volumes invested, weighing heavily on total volumes. Due to the deterioration of the market, investors are concentrating on their own national markets yet again.French investors remain the most active, i.e. mainly property companies, SCPI/OPCIs, private investors, owner-occupiers and insurance companies/pension funds, as they represent 72% of commitments.
Long term investors have taken centre stage: they tend to perform better during difficult periods and are less sensitive to the effects of cycles. These purchasers were less present on the market in the last few years, due to the increasing competition from international investors. However they are still attracted to core products which are now being offered for sale at less aggressive yields.Players are extremely selective, targeting secure assets let under long-term leases in good locations.
A SPREAD WHICH WORKS IN FAVOUR OF THE REAL-ESTATE INDUSTRY
Property yields have been subject to another general upwards shift, although much less marked than the shift seen in the previous quarter. Re-pricing should continue, notably for secondary and large-scale assets which remain particularly illiquid, generating less interest. However, yields may soon reach their peak, especially for high quality assets.
Central bank rates remain very low indeed. After having decreased sharply from 4.25% at the beginning of October to 1% this quarter, the European Central Bank have confirmed that they will maintain the rate at 1%. Therefore, the average Euribor three month interest rates were at around 1.22% in June, down from 5% on average last Autumn. The average OAT 10 year government bond rate was at 3.90 % in June 2009, following a gradual fall from 4.72% a year earlier. This should systematically help reduce financing costs.
The increase in the spread between the rising yields and falling base rates, works in favour of the real estate industry.
If we look further than the prevailing difficulties, there are some positive elements pointing to a slight recovery: available liquidity in the market (even though well below levels seen in the last few years), a more favourable financial environment, better value for money which can be appreciated by all players and lastly, the solid structural fundamentals of the resilient French market. However, lettings markets are deteriorating, illustrated by the downwards pressure on values and the increasing vacancy rate, casting a shadow over any possibility of an imminent recovery of the investment market in the short term.
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