The French Investment Market - July 2019

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Operators were worried that the exceptional investment dynamism would suffer at the end of 2019 due to a potential interest rate increase. However the opposite seems more likely, as yields continue to tighten and above all decrease, particularly in sectors with the greatest depth (CBD, Western CBD, etc.).
 

Investments increased during the first half of the year (+4.3%) but deals currently underway point to an exceptional H2: multiple mega deals are in the pipeline, and 2019 results would only be affected if these were delayed to 2020 or in the event of a surprise geopolitical/macro event.
 

The money is there, across all risk and asset categories (except retail which is suffering); demand remains low, which has led to record market values in a number of areas.
 

Pressure to invest equity is intensifying, but debt remains abundant. Caution is advised in this mirage-like market where location (and therefore rent resilience/potential growth) is the determining criteria for investors.
 

This makes for neglected markets where it is difficult to sell, and other where investors fight each other tooth and nail to secure deals... This leads operators to major gaps of analysis which could prove dangerous in the long term... So far, so good!

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Operators were worried that the exceptional investment dynamism would suffer at the end of 2019 due to a potential interest rate increase. However the opposite seems more likely, as yields continue to tighten and above all decrease, particularly in sectors with the greatest depth (CBD, Western CBD, etc.).

Arnaud de Sordi

Key figures July 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 

  • 4.3% increase at H1 with nearly €12.1 billion invested;
     
  • Q2 2019 volume is almost equivalent that of Q2 2018 (2.6%);
     
  • This suggests that 2019 investment market performance should resemble that of 2018.

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

  • €0-100 million deals have increased by +5.1%; deals of less than €50 million increased by more than 10%;
     
  • The share of €100-300 million deals decreased by -16.9% due to a lack of opportunities, yet these still represent 31.2% of total investment;
     
  • The €300-500 million segment fell by -47.4%, totalling only €811 million;
     
  • There was an explosion of transactions in excess of €500 million which increased by +142.5%. This is primarily due to the TERREIS portfolio sale to SWISS LIFE, and TISHMAN SPEYER's sale of LUMIERE to a consortium led by PRIMONIAL;
     
  • The market is dominated by major investments. Investments+€100 million represent 61.6% of all investments, i.e., a major proportion that is consistent yo-y.

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • Office investments increased by 9.2% totalling €9 billion, i.e., 75% of total investment. 22 of the 29 investment deals in excess of €100 million were for office space (across all locations)!
     
  • Retail space investments decreased by 21.9%. With a market share of only 9.4%, the sector is obviously in turmoil;
     
  • Logistics investments also decreased by 25.3% due to a lack of major portfolios, but demand remains strong;
     
  • Industrial investments remain weak, accounting for only 3% of total investment;
     
  • Real estate diversification increased by 17.1%. Hotel investment increased by +390%, yet represents only 4.5% of amounts invested.

Office yield rate

Office yields - Juillet 2019
20132014201520162017 2018S1 2019
Paris CBD4,25 – 5,00%4,00 – 5,00%3,50 – 4,25%3,10 – 3,80%3,10 – 3,80%3,00 – 3,80%3,10 – 3,80%
Paris secondary BD5,20 – 5,75%4,80 – 5,75%4,25 – 4,75%3,50* – 4,75%3,40 – 4,30%3,40 – 4,30%3,40 – 4,30%
La Défense6,60 – 7,50%5,60 – 7,50%5,00 – 5,50%5,00 – 5,50%4,10 – 5,75%4,00 – 5,50%4,00 – 5,50%
Other West CBD5,50 – 6,50%5,50 – 6,50%3,65 – 6,00%3,65 – 6,00%3,25 – 5,00%3,50 – 5,30%3,50 – 5,30%
Other Suburbs6,25 – 8,00%5,25 – 8,00%4,50 – 7,00%4,25 – 7,00%4,00 – 7,00%3,80 – 7,50%3,90 – 7,50%
Provinces5,70 – 8,00%5,40 – 8,00%5,00 – 8,00%4,80 – 7,25%4,00 – 7,00%4,00 – 7,35%4,00 – 7,35%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • Parisian prime rate stability will change after the low 3.10% rate for Q2 2019. 3% has already been confirmed for Q3;
     
  • Other yields continue to tighten despite more spectacular decreases in inner rim areas. These areas will see further decreases in the 2nd half of 2019.

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

  • Longterm investments (Core / Core +) represented 77.4% of investments, totalling more than €9.3 billion in H1!
     
  • Core/Core+ funds, propelled by Korean investors, increased investments by +25.8%, whereas SCPIs increased by +42.6% thanks to much better collections than in 2018, and OPCIs by +52.8%;
     
  • SIICs are decreasing their exposure: their investments decreased by 43.2%, garnering a minimal share of 2.6% of total investments;
     
  • Opportunistic money represents only 12% of amounts invested, a decrease of 16.8%;
     
  • Private investors remain minor market players, accounting for only 7.6% of total market investment. However their investments increased by +25.1% thanks to more accessible bank loans.

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 has powered ahead (+10.4%) garnering nearly 44.4% of all investments. The CBD has performed particularly well (12.2%);
     
  • Investment in Inner and Outer Rims has remained constant with nearly €4 billion invested, i.e., 33.2% of investments;
     
  • Portfolios are still scarce (6.2% of investments) and Regions remain an alternative for investors seeking yields, with a fairly consistent but relatively low investment share (16.5%);
     
  • The deepest and most secure markets (CBD, Office areas and Western CBD) attract nearly 43% of investments, which indicates that investors are predominantly interested in limiting risk.

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

  • Risk premium has never been as high due to the OAT decrease (bond rate) which dipped below a negative threshold;
     
  • This makes it possible to understand why yields continue to decrease, beating record after record in certain areas around Paris.