Real estate market France
No way around Paris
France stands as one of Europe's most dynamic property markets for investors, ranking third after the UK and Germany. Over the past decade, the average transaction volume has soared to approximately 35 billion euros. However, a staggering 70 percent of this volume is typically driven by domestic investors. “This dominance underscores the importance of a local presence in France”, says Etienne Marcot, Head of France at AM ALPHA.
In any case, there is no way around Paris. The capital attracts significantly more investor capital than all other French cities combined. In this centralised country, around 80 percent of the capital invested in French commercial real estate usually flows into the greater Paris area, the Île de France. This is the heart of the Republic and also the heart of the French commercial real estate market. And this is where the highest prices and rents are realised. The markets in locations such as Lille, Lyon, Marseille, Nantes and Toulouse are significantly smaller but offer investors the opportunity to enter the market much more favourably than in the capital of love.
Challenging times for office property
Offices were also the favourites of investors in France for many years. They generally accounted for around 60 percent of the transaction volume. However, this is over after the coronavirus, given the widespread trend towards working from home. According to figures from BNP Paribas Real Estate (BNPPRE), only €705 million was invested in office buildings in the first quarter of 2024, i.e. only a quarter of the total quarterly volume of €2.8 billion. This unusually weak figure for France - the ten-year average for the first quarter is €4.9 billion according to BNPPRE - can be explained by the after-effects of the attractive interest rates on French government bonds (Obligations assimilables du Trésor, OAT), among other things. They had temporarily reached over 3 percent for ten-year OATs in 2023. Interest rates are now stable at below the 3 percent mark. At the end of March 2024, the Banque de France paid interest on the bonds at 2.82 percent.
Growing yield spread to government bonds makes investments in real estate more popular again
As the yield compression for property investments has long since ended and significantly higher net initial yields are being offered across the country again, the spread between OAT yields and average property yields is approaching 150 basis points for office and retail properties and 200 points for logistics properties. This makes property investments much more attractive again. Etienne Marcot is convinced that this will soon be reflected in a significant increase in transaction volumes. 'The financing landscape has stabilised,' he says, 'the cost of financing is gradually falling, and most of the value corrections for property have now been made.' If the European Central Bank begins to lower its key interest rates in the coming months, as expected, this will help to improve market sentiment significantly.
Prime office yields: 4.25 percent in the CBD of Paris - 6.80 percent in Bordeaux
According to BNPPRE, prime yields for offices in the central business district of Paris stood at 4.25 percent in the first quarter of 2024. Gone are the days of early 2022, when prime yields at the cycle's peak were only around 2.70 percent. In the first quarter of 2023, they reached 3.15 percent again. Beyond the CBD, prime yields of 6.50 percent in La Défense or even 8.00 percent in the Outer Rim submarket are now possible again. In other cities, from Lille in the northeast to Toulouse in the southwest, yields range from 5.75 percent in Lyon to 6.80 percent in Bordeaux.
Excerpt from the AM ALPHA office portfolio in France.
Rising office space take-up indicates stabilisation of the market
AM ALPHA's Head of Asset Management in France, Gilles Chamignon, attributes the fact that prime rents for office space in Paris passed the 1,000 euros/sqm/year mark for the first time at the beginning of this year (only London is more expensive in Europe) to strong demand and a shortage of modern office space in attractive locations in Paris. 'Office take-up in the CBD of Paris increased by almost 15 percent compared to the first quarter of 2023,' explains Gilles Chamignon. 'Such figures indicate a stabilisation of the market. As in all European countries relevant to property investors, the market in France had been on a downward spiral due to the war in Ukraine, the ECB's sharp rise in key interest rates and the rapid increase in inflation rates.' However, there are now increasing signs that the bottom has been reached or passed. The price expectations of potential buyers and sellers are becoming more and more similar. Investors are advised not to wait too long to take advantage of the sharp price fall when entering the market.
One indicator that the time may be ripe is the involvement of US investors in the French property market. They are known for always being among the first to jump back in during a crisis. Typical US investors see opportunities earlier, whereas many others still tend to see risks and are more willing to make opportunistic investments. US investors were the French property market's most active foreign investor group in the first quarter.
Government ends rent cap for the weakening bricks-and-mortar retail sector
Investors remain cautious when it comes to retail properties. They are thus taking into account the trend towards online retail, where, according to the retail association Fevad, sales were 10.5 percent higher at the end of last year than at the end of 2022. In contrast, the French statistics office Insee recorded a 1.7 percent drop in the volume of goods sold in bricks-and-mortar retail in the same period. In addition, retail tenants must once again expect rents to rise much more sharply after the government of then Prime Minister Élisabeth Borne limited the cap on rent increases to 3.5 percent annually until the first quarter of 2024. With the state-imposed cap, the government wanted to protect the retail sector from an excessively high rent increase, which is generally indexed, in light of the sharp rise in the inflation rate in 2022.
Logistics and hotel properties are investors' new favourites
In contrast, investor interest in logistics and, above all, hotel properties is rising sharply. The main reasons for the popularity of logistics properties are the continued growth in online trade and the reshoring of companies' logistics hubs. However, it is primarily the hotel market that is attracting investors. The hotel sector is booming in a country where tourism accounts for almost 8 percent of gross domestic product and provides around two million jobs. In 2019, a record year to date, 90 million foreign tourists travelled to France, considered the world's most popular tourist destination. Property investors focus primarily on accommodation in the three and four-star categories. These are particularly popular with guests.
Press contact
Andreas Menke
Phone: +49 89 550 6989 - 00
E-Mail: press@am-alpha.com