The French Investment Market - April 2017

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The first quarter of 2017 has seen year-on-year investments 17% higher. This is a further positive sign of the continued dynamism of the market, although this performance is very much related to postponements from the end of 2016 to the beginning of 2017 regarding finalization of deals. However, the general opinion that the market would overwhelmingly wait for the results of the French elections has not come to pass … in fact, quite the contrary.

 

Capital remains abundant, although some investors, such as life insurance companies, have seen their collect reduced by certain provisions of the Sapin 2 law. The market continues to consider prices to be high, but the real estate risk premium remains exceptionally high, greatly helping to maintain the overall appeal of real estate, especially  commercial real estate.

 

As can be seen, the market remains concentrated on the most developed business districts, particularly those promising potential rental value growth in the medium term. Higher values would be due either to supply shortages for new or good quality buildings, or by the arrival of better public transport connectivity (notably the Grand Paris Express project) in the vicinity. Most of the investment has therefore been "core", even though the "value added / opportunist" possibilities are also clearly there, with new funds having adopted IRR objectives more in line with the market (i.e., 8% to 15% instead of 15% to 25%). It remains to be seen whether the arrival of the new French president will cool enthusiasm in this market, which is always more favorable to sellers.

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The first quarter of 2017 has seen year-on-year investments 17% higher. This is a further positive sign of the continued dynamism of the market, although this performance is very much related to postponements from the end of 2016 to the beginning of 2017 regarding finalization of deals.

Arnaud de Sordi

Key figures April 2017

Investment volume in the French non-residential market

Source : MBE Conseil

Investment volume in the French non-residential market

  • The first quarter has seen investment volume rise by 17% year-on-year, due in particular to the postponement of several deal finalizations at the end of 2016, which were concluded in Q1 2017;
  • However, investment influx remains far below 2015 - and especially from 2006-2008 - levels.

Non-residential investment volumes by size - portfolios and single assets

Source : MBE Conseil

Non-residential investment volumes by size - portfolios and single assets

  • A 92% increase in deals valued at between €100 and €500 million, reflecting a market that will be oriented in 2017 towards "mega deals";
  • A decrease of 23% in investments for assets valued at €100 million or less: a trend which will likely be confirmed in Q2.

 

Non-residential investment volumes by product type

Source : MBE Conseil

Non-residential investment volumes by product type

  • Impressive increase in office investments (+89%), with transactions valued over €100 million representing 66% of the total!
  • Warehouses maintained market share and should increase, unlike light industrial premises;
  • Retail assets have been experiencing a slowdown (-58%), but this should only be a short term trend.

 

Non-residential investment volumes by investor type

Source : MBE Conseil

Non-residential investment volumes by investor type

  • Insurance companies have been less present at the beginning of the year (-50%), likely due to their lower collects under the Sapin 2 law;
  • SCPIs and OPCIs are also less present (-13%), however acceleration should occur in Q2, since collects have remained strong;
  • A very strong (+116%) increase in Core and Core + activity, further indicating the strong interest in the French market. 

Non-residential investment volumes by location

Source : MBE Conseil

Non-residential investment volumes by location

  • Paris has seen unprecedented levels of investor interest, with a 106% year-on-year increase;
  • The business districts in the West CBD and the secondary business districts of Paris have increased by 57%, confirming their appeal.
  • Investments in outer suburban markets have increased by 41%, reflecting investors seeking more attractive yields.

Office market prime yields vs. government bond yields

Source : MBE Conseil

Office market prime yields vs. government bond yields

  • Despite the rise in ten-year government bonds, the property risk premium remains attractive because of its height;
  • The real question remains the impact of the results of the French presidential election on yields for both types of investment.

 

OFFICE MARKET YIELDS

Office yields - Avril 2017
20122013201420152016Q1 2017
Paris CBD4,5 – 5,0%4,25 - 5,0%4,0 - 5,0%3,5 - 4,25%3,10 - 3,80%3,10 - 3,80%
Paris secondary BD5,5 - 6,0%5,2 - 5,75%4,8 - 5,75%4,25 - 4,75%3,5* - 4,75%3,5* - 4,75%
La Défense5,5 – 6,5%6,6 - 7,5%5,6 - 7,5%5,0 - 5,5%5,0 - 5,5%5,0 - 5,5%
Other West CBD5,5 – 6,0%5,5 - 6,5%5,5 - 6,5%3,65 - 6,0%3,65 - 6,0%3,65 - 6,0%
Other Suburbs6,25 - 7,0%6,25 - 8,0%5,25 - 8,0%4,5 - 7,0%4,25 - 7,0%4,05 - 7,0%
Provinces5,8 - 8,0%5,70 - 8,0%5,40 - 8,0%5,0 - 8,0%4,80 - 7,25%4,80 - 7,00%
Source : MBE Conseil / * : theoretical rate

OFFICE MARKET YIELDS

  • Q1 2017 has seen a moderate consolidation regarding yields, but it is likely that a slight drop will occur in the second quarter, highlighting the current massive imbalance between the volume of capital in the investment market and the reduced number of products available.