The French Investment Market - November 2019

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Q3 investment continued at the staggering pace sustained by the corporate real estate investment market in France. Given that Q4 tends to be the strongest quarter, 2019 should be the most impressive year yet. Total investment volume could reach €33-34 billion…
 

Some economists predict "longer lower": if low rates persist for an extended period, this trend should continue. It wouldn't be surprising if yield rates continue to fall in coming months; the real estate spread compared with ten-year bonds (OAT) is abnormally high.
 

Yet real estate investors remain attentive to market values, which are becoming vertiginous in some markets.
 

What are the consequences of the persistent imbalance between the abundant equity available for all risk / asset categories, and the scarcity of available assets (which is relative if considering only volumes)? Only macro-economics and geopolitical events could disrupt the current phenomenon, but these are difficult to anticipate!

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Q3 investment continued at the staggering pace sustained by the corporate real estate investment market in France.

Arnaud de Sordi

Key figures November 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 

  • The 2nd most prolific Q3 in history, more than €8.2 billion were invested, i.e., an increase of +36.7% compared with Q3 2018.

  • An investment amount equivalent to Q2 and Q3 proving the market's new normal.

  • A total volume of €21 billion were invested at 9 months, i.e., a total increase of +19.3% compared with the first 9 months 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

  • The heart of the market remains the €100 to €300 million segment which represents 30.7% of investments, a robust increase of +11.1% at 9 months.

  • The most impressive increase however is in deals in excess of €500 million: these increased by +154.5% with 4 transactions, including Le Lumière and the Terreis portfolio which each exceeded one billion euros.

  • The €0 to €100 million segment is more dynamic than it looks. It accounted for 38.9% of investments, and enjoyed a slight increase of +4.9%, proof of the resilience of this segment.

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • Offices remain by far the most sought after asset category, representing 70.4% of amounts invested at 9 months, i.e., an increase of 27.3% (33 of the 48 transactions in excess of €100 million were for office space!).

  • Retail investment remains constant and low, representing 11% of investments.

  • Light industrial and logistics represent 12.2% of investments, an increase of +16.4 compared with the first 3 quarters of 2018.

  • Diversification assets (Health / Hospitality) still only represent 6.4% of investments (Health dropped by –48%, whereas Hospitality increased by +17%).

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

  • Savings collectors (Insurance companies / SCPI / OPCI) were responsible for 29.7% of investments. SCPI investments increased by +62.9% (confirming a strong renewed momentum in collections in 2019), whereas insurance companies' investment dropped by -30.6% due to their difficulty in finding products that fit with their investment strategies.

  • Core and Core+ funds are the most active, accounting for 46.7% of investments, i.e., a major increase of +37.5%. This is primarily thanks to the arrival of new American "core" funds.

  • Property companies remain discrete and cautious. They represented only 5.8% of total investment (only €718 million invested in 2019 by SIICs), which confirms that the core+ / value-add strategy is not easy, even when there are no time constraints for ownership and completing value creation work...

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

  • Boosted by La Défense, the Western CBD experienced the largest investment increase (80.7%), representing 16.9% of total investments.

  • Paris continues to polarise investor interest. 33.3% of all investments were concentrated in the capital, more than half of which was invested in the CBD. This is a relative stable performance compared with 2018 (-2.3%).

  • Inner and Outer Rims attracted 24.2% of investment. Excluding portfolios, the greater Paris area therefore totalled 74.4% of all investments, i.e., nearly €15.7 billion at 9 months!

  • Regional investment remained consistent at 19%, i.e., a nice increase of 10.9%, which indicates investor interest in alternative yields and different risks.

Office yield rate

Office yields - Novembre 2019
20132014201520162017 20189 months 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%3,70 – 7,35%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • At first sight, rates remain fairly stable on current spreads according to sector.

  • However, it is the first time since 2016 that the Paris CBD "prime" rate dropped to nearly 3%, which had a tangible effect on offices; this threshold has already been crossed in current transactions.

  • The "prime" rate tightening is due to the fact that the 4% threshold has clearly been surpassed in the most secure markets with greatest depth, or in those on the fringes of the Périphérique ring road that are experiencing a Grand Paris effect (or in Lyon, the only regional market that has repeatedly exceeded this mythical threshold)…

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 drastic drop in OAT ten-year bonds to negative thresholds reinforces the real estate risk premium, which is at a level which the "flight to quality" can only exacerbate.

  • The volume of equity available and the scarcity of products will therefore continue to drive prices skywards.