The French Investment Market - November 2020

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The investment market continued to decline in Q3 2020. Average investments as well as the total number of transactions have both fallen. Mega-deals are becoming scarce as the financing market has contracted and foreign investors have disappeared.
The economic recession will undoubtedly lead to rent and yield adjustments, which will depend on location and the quality of building fundamentals.
Yet two factors have contributed to the market's resilience: now more than ever, real estate has a solid risk premium, and several investors have large amounts of equity available.

Our vision of the French Investment Market
The view of Delphine Mutterer

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The investment market continued to decline in Q3 2020. Average investments as well as the total number of transactions have both fallen. 

Delphine Mutterer

Key figures November 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 

  • After a major Q1 increase, the Covid-19 health crisis and corresponding lockdown have significantly slowed the investment market, which totalled €14.5 billion (before duty) over the first nine months of the year.
     
  • In addition to a mechanical slowdown attributable to lockdown, investment contraction can also be explained by increased risk aversion among all market players. Caution is the rule across all asset categories. Average investment volumes have fallen as debt is becoming increasingly rare and reasonably sized assets are considered more liquid for resale.
     
  • However, there are still large amounts of equity available, particularly among funds and insurance companies who consider the market adjustments as a new indicator.

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

  • Investments < €50 million have contracted by more than 50% in volume; this is due to the collapse in the number of transactions, which halved in 2020 compared with 2019.
     
  • The €100-300 million market segment has proven resilient in the first 9 months, with nearly 40 transactions signed for more than €6 billion. This is of course a slight decrease compared with 2019 (-14%), but an increase compared with 2018 (+5%).
     
  • For deals > €300 million, investments totalled approximately €3.9 billion, a figure in line with those of 2017 and 2018. However it is still a decrease compared with 2019. Large investments have been disproportionately penalised by the lending market becoming less generous and more selective.

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • The office market has suffered a net decline over the first 9 months of 2020 (-37%). This is both due to a decline in number of transactions, but also the quasi-disappearance of investment in market sectors with the least leasing depth or least accessible by public transport.
     
  • The logistics segment has remained stable as the average transaction size has increased. And yet, the number of transactions halved in the first 9 months of 2019 compared with the same period in 2020 (57 transactions by Q3 2019 vs. 26 by Q3 2020).
     
  • Retail's performance is largely the result of URW's sale of 54% of a portfolio of 5 shopping centres; this transaction represented nearly 50% of 2020 investment volume. 

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

  • Fund investment has suffered a net decline in the first three quarters (-57%). This is primarily due to the complete disappearance of Asian funds which were highly active in 2019, and by the extreme caution observed for opportunistic and core+ transactions.
     
  • Insurance companies' performance is primarily based on the acquisition of 54% of URW's portfolio of 5 shopping centres for €1.1 billion, and the acquisition of the CITYLIGHTS tower in Boulogne-Billancourt for €500 million.
     
  • After an exceptional 2019, SCPIs have recorded their second best investment level ever. We note two PRIMONIAL acquisitions in Q3: 29,000 sq m in ONE MONCEAU sold by NEUFLIZE VIE, and the MEUDON CAMPUS (21,600 sq m) sold by PGIM.

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

  • All sectors have suffered a contraction in investment volumes.
     
  • The inner rim is proving highly resilient, primarily due to a number of Q3 transactions in Malakoff (SAFRAN and TANGRAM head offices).
     
  • The Western CBD has suffered a major decrease in investment as a result of the total absence of any transactions in La Défense in 2020, vs. €2.5 billion in 2019 (MAJUNGA, ECHO, CBX among others).
     
  • Yet in Q3, Boulogne-Billancourt has recorded several substantial transactions such as CITYLIGHTS, ANTARES, WELL WEST and CLARITY, as a result of which the city's new prime yield is 3.25%.

Office yield rate

Office yields - November 2020
201420152016201720182019Q3 2020
Paris CBD4,00%3,50%3,10%3,10%3,10%3,00%2,80%
Paris secondary BD4,80%4,25%3,50%3,40%3,40%3,40%3,40%
La Défense5,60%5,00%5,00%4,10%4,00%4,00%4,00%
Other West CBD5,50%3,65%3,65%3,25%3,50%3,60%3,25%
Other Suburbs5,25%4,50%4,25%4,00%3,80%3,90%3,67%
Provinces5,40%5,00%4,80%4,00%4,00%3,70%3,60%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • Q3 confirms historically low prime yields across all sectors. It is important however to note that some sectors, such as the Outer Rim and La Défense, have recorded few or no transactions.

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

  • From the end of January 2020, the 10-year treasury bond (OAT) yield has again become negative;
     
  • Inflation remained low at 0.2% for H1 2020;
     
  • Prime yields in Paris CBD have remained low, and even decreased, due to the risk premium remaining high at nearly 320 bps.