A second-quarter decline in investment volumes, a reality that should not conceal promising sources of satisfaction for an expected rebound.
First, the return of foreign investors, primarily Anglo-American funds, but also Middle Easterners and Koreans, especially in offices and logistics.
In the office market, which still represents around 2/3 of total invested volumes, investors focused on core assets, but there were very few assets to sell in this segment.
Even at the cost of certain significant value adjustments outside Paris, the rental market got back on track and set in motion a new positive dynamic against the backdrop of a business climate barometer back at its highest level since 2007.

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A second-quarter decline in investment volumes, a reality that should not conceal promising sources of satisfaction for an expected rebound.

Delphine Mutterer

Key figures July 2021

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 investment market was down 24% from Q2 2020, with barely €3 billion invested, well below the 10-year average of second quarters with €5.84 billion;
     
  • Over the entire first half of the year, there was a cumulative decline of nearly 39% compared with 2020, which itself was down compared with the trend of previous years;
     
  • Over this past quarter, the market was clearly driven by major portfolios diversified in logistics, health, and open-air hospitality. The office segment struggled to mobilise on large transactions, with only two over €100 million, both sold by Icade: MILLENAIRE 1 in the 19th district of Paris and the LOIRE building in Villejuif.

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 first half illustrates the refocusing on small and medium sized transactions. There was a sharp drop in €100–300 million transactions in Q2 2021 (14 transactions in Q1 versus 6 in Q2), an 18% decrease in amounts invested in this segment compared with the first half of 2020;
     
  • Only one transaction over €300 million was completed in Q2: the French portion of a pan-European logistics portfolio.

Amounts invested in non-residential real estate per product

Source: MBE Conseil

Amounts invested in non-residential real estate per product

  • With nearly €4.8 billion, office assets still represented more than 63% of investments. They accounted for 14 of the 22 transactions over €100 million in the first half of the year, but only two of them were completed in Q2;
     
  • The logistics segment recovered in Q2 with a total exceeding €1.6 billion in the first half, or 21% of total investments, and five transactions over €100 million, including three in Q2;
     
  • Diversification real estate has been growing in volume, even though it is still often driven by a large transaction that conceals a market that continues to be shallow;
     
  • In the hospitality segment, the portfolio of nine campsites acquired by several SCPIs represented 67% of the market, and the ELSAN portfolio of clinics acquired by PRIMONIAL on behalf of a club deal represented 78% of the health market over the first half;
     
  • The retail market continued to be very much in decline and highly affected by the health crisis.

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

  • The first half was marked by the continued presence of funds, which represented 64% of total investments in the first half of 2021. They were especially present in large assets, a segment where they accounted for 16 of the 22 transactions over €100 million;
     
  • It is worth noting that no Value-added transactions over €50 million were completed during the first half;
     
  • SCPIs levelled off, especially in office property vehicles, while diversification investment vehicles enjoyed greater inflows;
     
  • Insurance companies saw a significant decline of 78% in direct investments over the first half. However, these figures should not conceal their continued indirect investments in diversification vehicles and residential property. Also recall that they had greatly increased their investment in 2020 compared with financial year 2019 (+37% yoy), setting a high reference year of 2020.

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

  • There was generally little activity in Q2 2021 regardless of the greater Paris region location;
     
  • Over the first half of the year, investments in the Paris CBD (29%) and in the Other Paris sector (-39%) decreased, and tertiary districts have still been inactive since 2020.
     
  • The Western CBD held up well (+37%), thanks in particular to a large transaction in the first quarter (SHIFT in Issy-les-Moulineaux);
     
  • The decline in activity in the outer ring of suburbs, already substantial in 2020, gradually spread to the inner ring, which stagnated on office assets (42% over the first half);
     
  • There was a strong rise in the regions during the first half (+41%), supported especially by the signing of four major logistics, health, and open-air hospitality portfolios in Q2.

Office yield rate

Office yields - July 2021
2014201520162017201820192020S1 2021
Paris CBD4,00%3,50%3,10%3,10%3,10%3,00%2,80%2,75%
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%-4,35%
Other West CBD5,50%3,65%3,65%3,25%3,50%3,60%3,25%3,50%
Other Suburbs5,25%4,50%4,25%4,00%3,80%3,90%3,67%4,00%
Provinces5,40%5,00%4,80%4,00%4,00%3,70%3,40%4,30%
Source: MBE Conseil / * : theoretical rate

Office yield rate

  • Yields held up well overall in the first half of the year;
     
  • The low level of prime rates in Paris was confirmed, as competition continued to be intense for the best assets in Paris, which are the focus of investors looking for core products;
     
  • Nevertheless, a few curve inversions, or even yield increases, took shape on markets with large rental space inventories, such as the La Défense or Other Suburbs sectors, in particular on the northern and eastern fringes;
     
  • Although still tentative, the recalibration of risk premiums according to sector and asset quality is well under way.

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 fungible treasury bond (OAT) yield went slightly back into the black (0.1%), but given the resurgence of inflation, inflation-indexed bond (OATi) yields decreased;
     
  • Consequently, despite the slight compression of the prime yield on offices, the risk premium increased this quarter to 371 basis points, a level still largely sufficient to support real estate;
     
  • However, the pure and simple analysis of the real estate market in terms of risk premium compared with the bond market must be qualified in a complicated economic environment for companies. If the risk premium exists from the moment when rents are paid, the counterparty’s creditworthiness becomes (again) a central issue. In addition, the new demands of tenants call for greater flexibility, shorter leases, mixeduse spaces, and even variable rents… all parameters that could reshuffle the cards of prime yields and risk premiums in the coming years.