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The French Investment Market Has Gained Momentum
5 Oct, 2010, Paris
With €6.9 billion transacted in the first nine months of the year, the French commercial real-estate investment market has registered a 41% increase compared to the same time last year and has gained in momentum since its low point in 2009 when the total annual investment volume did not exceed €7.8 billion.
After a slow start to the year in the first quarter (€1.5 billion) and a more promising second quarter (€3 billion), the third quarter of 2010 recorded investments of €2.4 billion.
Large deals are back
Improvements in financing have encouraged an increase in large sized deals and notably in deals of over €100 million. Since the beginning of the year, 268 transactions have been recorded, including 11 over €100 million (compared with 7 at the end of the 3rd quarter of 2009), 4 of which were over €200 million, representing 19% of the total volume invested.
Investments according to asset type
Offices and retail remain the most sought after asset types by investors. Whilst offices are still the predominant product, they have lost market share (representing only 58%) to the advantage of retail assets, which represent 35% of commitments in France.
Thanks to a wider range of potential buyers, greater available supply and yields having stabilised, retail property continues to perform well, consolidating its increasing market share. With a total of €2.4 billion invested so far this year in retail, volumes are greater than those recorded in the past two years (€1.9 billion in 2009 and €1.2 billion in 2008). Retail investments have also been sustained by the realisation of large transactions: deals of over €100 million account for 44% of retail investments. Shopping centres and shopping arcades have been the most active of these, accounting for 59% of investments in retail property in France.
Despite a slight improvement due to greater interest for grade A logistics platforms, the industrial market has not yet been able to regain its former level and now accounts for just 7% of total investment volume
Investments according to location
Throughout the first 9 months of the year, €4.8 billion were invested in the Ile de France real-estate market, accounting for 70% of all investments in France. Over the course of a year, investments in Ile de France went up by 51%, compared with 23% in the provinces.
Accounting for 30% of investments in France, regional districts have continued to maintain significant market share, mainly thanks to retail property which represents 75% of regional investments and which witnessed a 97% increase compared to the end of the third quarter of 2009.
Investors continue to favour quality assets, which are securely let and well located. Therefore, the Ile de France office market has offered the product with the required risk profile and represents 53% of all investments in France. In particular, Paris, the Western business districts and the inner suburbs have benefited from the fact they are considered as core investment destinations.
The French market is still dominated by two nationalities (the French and the Germans, who together account for three quarters of acquisitions), followed by Sovereign funds. Equity players continue to dominate the market, whilst opportunistic investors continue to take a backseat, hence the disappearance of value-added transactions.
The “re-internationalisation” of the French investment market is markedly underway: over the course of a year, foreign investor market share has risen by 101%, whilst the national share has gone up by only 14%, proving that cross-border investors are attracted to the French market. At the end of the third quarter, foreign investment had accounted for 48% of acquisitions.
Prime property yields have been falling since the end of 2009. At the end of the third quarter of 2010, the average prime yield had fallen by 11% compared to the same time in 2009 or by 75 bps from 6.63% to 5.88%, across all sectors. However, the fall in prime yields is expected to slow down and stabilise within the next few months. Currently, prime office yields in Paris CBD stand at around 5%, prime shopping streets at around 4.75% and prime shopping centres at around 5.25%. On the other hand, prime logistics yields stand at approximately 7.25%. The increase in prime rental values is a reflection of sustained demand from occupiers coupled with the fall in yields, which have also pushed up capital values. The latter had started to go up in the second quarter of 2010. Equity allocations for real estate are still considerable, especially for core product due to the underlying issues with financing. Financing costs remain low and the spread between property yields and government bonds, which fell under the 3% mark this summer, remains attractive and at over 220 bps in Paris CBD for prime assets.
Whilst core assets in the most liquid markets continue to focus investor interest, greater demand for value-added products and sectors is likely to come about in the next few months. The drying up of prime supply and the search for higher property yields are two reasons why investors may be encouraged to expand their property search criteria, as might be the case for speculative developments. According to Olivier Gérard, Managing Partner at Cushman & Wakefield, “These may be encouraged by the likely future shortage of new supply in certain geographical districts. However, in view of the sovereign debt crisis, investors will remain prudent in terms of any significant increase in exposure to risk”.
Gérard continued, “Even though a moderate improvement in supply, due to higher activity from some vendors, should help sustain the investment market with volumes estimated at between €9 and 10 billion for the year overall, i.e. +22% compared to 2009, figures will still remain low and below the average of the last 10 years (€14.5 billion)”.
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