The French Investment Market - May 2020

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As in 2019, the investment market had a record Q1 in 2020. Historically low interest rates have fuelled the significant number of major transactions concluded in the quarter. Investors are prioritising real estate as an asset category and consequently increasing their investments.
 

However, the global health crisis will undeniably impact the real estate market in Q2, and the start of a global economic recovery is still a few months away.
 

Short-term investment market depth will depend on how quickly prices change based on supply and demand. Should the current trend of treading water end relatively quickly, there will be a healthy rotation of assets between investors.
 

Over the past 30 years, crises have proven the catalyst for several successive real estate cycles. Despite a number of sudden breaking points, the long-term real estate market trend has been persistent, and even increased, investment. This long-term trend can be sustained in coming years if market fundamentals remain under control in the months ahead: a soft landing for prime rent values, marginal and balanced increase in vacancy rates, phased future availability in sectors where there is a potential for excess supply, and a sustained minimum spread between prime and 10-year treasury bond yields.    
 

Despite the lockdown, the current period is already proving a catalyst for new priorities in terms of building design, use and mutability. As a result of these changes, the occupier-investor partnership will undoubtedly once again take centre stage for a new status quo! 

Our vision of the office Market
The view of Delphine Mutterer

SUBMARKETS MAP

As in 2019, the investment market had a record Q1 in 2020. Historically low interest rates have fuelled the significant number of major transactions concluded in the quarter.

Delphine Mutterer

Key figures May 2020

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 

  • The market had its best first quarter in the last 12 years. Investment volumes increased by 42% compared with 2019, which was already an excellent year.
     
  • At 31 March, the health crisis had not yet impacted transaction volumes. This illustrates the solidity of the real estate market's fundamentals at the time of lockdown.
     
  • However, in light of the last few weeks and the downgraded annual growth forecasts, we are aware that this excellent first quarter does not presage an exceptional year, but rather one where increased visibility and renewed trust will be prioritised.

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 market was clearly sustained by transactions in excess of €100 million, which represented 66% of all investments, and more specifically by megadeals.
     
  • There were 4 transactions in excess of €300 million in Q1 2020, versus only 1 in 2019: these were for single asset offices (Rue Bergère, and Aquarel) and logistics portfolios (Green Oak portfolio, Hub&Flow portfolio).

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • The first quarter witnessed new trends that will be accentuated at the end of 2020: the logistics market exploded (x2.8 at Q1) and although interest is sustained for offices, there was a net decrease in retail and hotel investment.
     
  • There were 16 transactions in excess of €100 million for offices, i.e., 45% more transactions than in 2019 and 90% more in terms of volume: this main asset category is increasingly attracting equity given the low interest rates.
     
  • With more than 1.5 billion euros invested in one quarter, the foundations are being laid for a new record year for logistics, sustained by major portfolio investments.
     
  • Well before lockdown, retail had already begun to contract. Retail Q1 declined by 52% compared with 2019; in fact, the figures are even starker given that more than 50% of retail investment for the quarter consisted of a single transaction: the CIFA centre sale in Aubervilliers.

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

  • Given their significant equity, funds have accelerated their investments in Q1, both for Core and Value Add transactions. This indicates that at the time of lockdown, short and mediumterm expectations were positive and based on solid fundamentals. These investors are sensitive to the duration of carrying costs for Value Add, and are therefore likely to be significantly more cautious in the months ahead.
     
  • The slight decrease in SCPI investments in Q1 is primarily due to scheduling: SCPIs traditionally finish the year with record figures in Q4, and Q1 is often the quarter during which they initiate new investments.
     
  • Q1 was marked by the significant return of insurance companies, particularly 2 major players who together accounted for 60% of volumes invested by this category of investor.

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

  • In Q1, and for the first time in history, as much capital was invested in the CBD as in the wider 'Other Paris' sector. This illustrates the major trend of increased investment in centre and eastern districts, which have greater longterm value creation potential.
     
  • The Western CBD was sustained by 2 major office transactions (Aquarel in Issy-les-Moulineaux and On Seine in Levallois-Perret).
     
  • A number of major logistics portfolios were transacted in Q1, confirming a trend initiated in 2019.

Office yield rate

Office yields - Mai 2020
20132014201520162017 20182019Q1 2020
Paris CBD4,25 – 5,00%4,00 – 5,00%3,50 – 4,25%3,10 – 3,80%3,10 – 3,80%3,10 – 3,80%3,00 – 3,80%2,70 – 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%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%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%3,60 – 5,30%3,70 – 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%3,95 – 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%3,70 – 7,35%3,60 – 7,35%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • Sporadic and targeted office yield contraction in Q1 stabilised at 2.7% in the CBD, which will undoubtedly prove the low point for the year.
     
  • The global health crisis is encouraging investors to act cautiously. This is evident as investors prioritise for the bestconnected geographic sectors with good rental depth. Also, whereas Paris, Lyon and the Western CBD should prove resilient, we can expect varying yield decompression in other sub-markets.
     
  • This will result in a healthy yield benchmarking between geographic sectors, a practice that had all but disappeared over the past 18 months due to competition.

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

  • Paris prime yield decreased in Q1, dropping to 2.7% AEM after a stable few months. This is a nonspeculative contraction.
     
  • The risk premium for real estate remains solid compared with the 10-year treasury bond, which currently hovers more or less around 0.