The French Investment Market - February 2019

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2018 was an exceptional year with more than 30 billion euros transacted. This confirmed large global financial asset managers' appetite for real estate assets, given the bond market's low returns. Several new investment vehicles have appeared whose themes and strategies are evolving, with appropriate expectations (lower TRI, more reasonable multiples). Debt is also more accessible and more present, although LTVs remain a far cry from those seen in 2007.

 

However a tremendous imbalance between supply and demand remains. A lot of equity, and few available properties: this combination continues to drive prices upwards, with a magnified selectivity on products and locations. This makes for a two-speed market: the most promising locations are oversubscribed, whereas lesser known areas are nearly deserted. 2019 got off to a slower start, but as long as ECB rates stay put, the base trend of the past several years should continue (unless a major geopolitical phenomenon changes current events...)

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2018 was an exceptional year with more than 30 billion euros transacted. This confirmed large global financial asset managers' appetite for real estate assets, given the bond market's low returns.

Arnaud de Sordi

Key figures February 2019

Amounts invested in the non-residential real estate market in France 

Source: MBE Conseil

Amounts invested in the non-residential real estate market in France 

  • 2018 was exceptional, and had the best Q4 ever with nearly €12.1 billion euros invested, i.e., an increase of 7.6% y-o-y!
     
  • A total investment volume of approximately €30.2 billion, i.e., a 10.2% increase from 2017 to 2018. This confirms the absolute dynamism of the nonresidential investment market in France.

Amounts invested in non-residential real estate by size portfolios and single assets

Source: MBE Conseil

Amounts invested in non-residential real estate by size portfolios and single assets

  • The €0-100 million segment remains stable (slight investment increase of +3.3%). This segment is inverted compared with 2017, as €0-50 million deals have decreased and €50-100 million deals have increased;
     
  • Nearly 60% of investments are concentrated on transactions of €100 million or more, proof that major deals are attracting investors more than ever;
     
  • The €100-500 million segment accounted for 50.1% of total investment, i.e., a +35.7% increase compared with 2017!
     
  • Investments of less than €50 million have a 17.9% market share; deals of more than €500 million have a 12% market share. This confirms that the core market is situated between €100 and €300 million.

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • Investments have increased across all asset types except logistics: although the sector is highly sought after, it is suffering from the absence of a megadeal rivalling that of Logicor in 2017;
     
  • Office investments have increased by +13%, representing nearly 68% of total investments (€20.6 billion), which is colossal!
     
  • 13 transactions of more than €300 million accounted for 30.6% of office investments...
     
  • Industrial premises and warehouses represented 11.7% of investments, i.e., a 25.5% decrease;
     
  • Retail investment has surprisingly increased by +15.1%, garnering 14.4% of total investment, despite being a sector that generates mistrust among investors given\ high rents and the effects of e-commerce.

Amounts invested in non-residential real estate  per type of investor

Source: MBE Conseil

Amounts invested in non-residential real estate per type of investor

  • Funds (core / core+ / opportunistic) total more than €17 billion, i.e., 56.3% of investments, which is an increase of +55.1%!
     
  • Savings collectors (insurance companies, SCPI, OPCI) represent 31.1% of investments, i.e., a -25.3% decrease. This confirms a general investment decrease by these types of investors (SCPIs have halved their investments) after an astounding 2017;
     
  • Private and public property company investments are stagnating (-0.3%), which represents a measured share of annual investments: 11.5% due to a general lack of value creation transactions in established sectors.

Amounts invested in the Île-de-France region  by geographic area

Source: MBE Conseil

Amounts invested in the Île-de-France region  by geographic area

  • Paris alone garnered €10.7 billion, i.e., 35.4% of total investments which is an increase of 67.8%: the CBD increased by +123% compared with 2017 (61.5% of amounts invested in the capital);
     
  • Amounts invested in Parisian suburbs increased by 18.6%, totalling €6.7 billion (22% of investments);
     
  • Regions (20.4% of investments) and portfolios (6.9% of investments) retained a fairly stable market share (slight -4.8% decrease).

Comparative evolution of "prime" yield rates for offices and long-term bond yields

Source: MBE Conseil

Comparative evolution of "prime" yield rates for offices and long-term bond yields

  • The risk premium has risen once again, due to inflation and the OAT rate decrease, and remains at record levels;
     
  • It is currently at more than 400 basis points, if inflation is taken into account. This spread will continue to attract bond market investors to the real estate market, even if real estate's market share remains small (10%) among large global asset managers and insurance companies...

Office yield rate

Office yields - Février 2019
201220132014201520162017 2018
Paris CBD4,50 – 5,00%4,25 – 5,00%4,00 – 5,00%3,50 – 4,25%3,10 – 3,80%3,10 – 3,80%3,00 – 3,80%
Paris secondary BD5,50 – 6,00%5,20 – 5,75%4,80 – 5,75%4,25 – 4,75%3,50* – 4,75%3,40 – 4,30%3,40 – 4,30%
La Défense5,50 – 6,50%6,60 – 7,50%5,60 – 7,50%5,00 – 5,50%5,00 – 5,50%4,10 – 5,75%4,00 – 5,50%
Other West CBD5,50 – 6,00%5,50 – 6,50%5,50 – 6,50%3,65 – 6,00%3,65 – 6,00%3,25 – 5,00%3,50 – 5,30%
Other Suburbs6,25 – 7,00%6,25 – 8,00%5,25 – 8,00%4,50 – 7,00%4,25 – 7,00%4,00 – 7,00%3,80 – 7,50%
Provinces5,80 – 8,00%5,70 – 8,00%5,40 – 8,00%5,00 – 8,00%4,80 – 7,25%4,00 – 7,00%4,00 – 7,35%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • Prime CBD yield remains stable, even if the symbolic 3% threshold was crossed as a result of the notorious sublet situation or retail aspect;
     
  • Overall, rates are tightening: the spread on prime yields is decreasing, ranging from 3%-4% depending on the location;
     
  • On the other hand, the 2 speed market has been confirmed, particularly as soon as you leave business districts: secure investments are prioritised (excellent accessibility, market depth or confirmed potential, technical quality of property, etc.);
     
  • Some rates are increasing for unremarkable assets in less visible markets.