Experts panel discussion, live Q&A, moderated by Richard Betts
Outlook 2023: resilient France weathering the crisis better
France is weathering the crisis much better than other European countries, experts agreed at Real Asset Media’s European Outlook 2023 – Focus on France briefing that was held this week at Taylor Wessing’s Paris offices.
“The market has changed a lot in the last twelve months but France is very stable compared to other regions in the world”, said Benjamin Cartier-Bresson, Head of Paris office, Berlin Hyp. “Things will have to change and assets will be re-priced, but the process will be smoother in France than elsewhere”.
The resilience of the French market is due to several factors: the depth and liquidity of the market, the strong presence of domestic investors, who account for 60-65% of transactions and the constant inflow of new capital from abroad, especially from the US and the Middle East.
“There’s a drop in activity because of the uncertainty and all the reasons we know, but the combination of active French investors and international capital makes it a very stable market”, said Guillaume Turcas, Managing Partner, Faro Capital Partners. “Paris in particular is in a very strong position compared to Spain or Italy or even Germany, where there is more distress”.
The market is resilient also because it is flexible and functions in a slightly different way, but it requires a deep knowledge of its workings.
“You have to know the French market well to get a good deal”, said Alfred Fink, Partner, TaylorWessing. “The big funds in France are doing their math and looking at off market sales to avoid a big crash. If there’s distress it’s kept in check and not brought out into the open. There’s a flexibility and a willingness to have a smooth transition. That’s why in France we don’t have the big crashes you see in the UK or elsewhere”.
Investors who don’t need financing and have equity on their side can do the deal quickly and typically get a 5-10% discount as well.
“Debt funds set up by big US insurance companies have found their way to France via London or Luxembourg because development finance is not easy to get here because of the rise in construction risks and costs”, said Fink. “But private equity is prepared to take that risk, at a price”.
Another recent development is increasing activity by High Net Worth Individuals, that are driven by high inflation to invest in real estate.
“We’re seeing more HNWIs coming in and they are prepared to put €200-300 million in”, said Fink. “They’re happy to park their money for a few years to stabilise their revenues and get some uplift later. These are the two important capital providers that are now disproportionately present on my desk”.
The topic of the re-evaluation of assets is much discussed in France, especially by big funds that have huge portfolios and are going to take a big hit. However, the transition is likely to be smooth and not disruptive, experts agreed.
“We’re seeing a market where prices go down, which is natural after a long period of prices going up”, said Cartier-Bresson. “But that’s very different from seeing distress”.
ESG compliance a must to preserve assets’ value
The need to be ESG-compliant is changing the French real estate market, experts agreed at Real Asset Media’s European Outlook 2023 – Focus on France briefing.
“Sustainability used to be just a word, but now it’s a goal for everyone, owners, developers and tenants”, said Jean-Marc Blanc, Managing Director, Head of France & Belgium, Trammell Crow Company. “It has become a reality. Today it helps preserve the value of your asset, but in the future it will help you achieve rental growth. We’re already seeing the beginning of that rental growth”.
There is a growing acceptance among investors, lenders and operators that ESG compliance is a necessity even if there is no immediate or tangible reward.
“The ESG topic is a new thing”, said Benjamin Cartier-Bresson, Head of Paris office, Berlin Hyp. “For the first time you have to deploy money to protect the value of your asset rather than to create value. It can be quite frustrating as it’s a substantial investment, but it keeps the asset liquid and of course it’s good for the planet”.
Unlike a few years ago, people now are prepared to invest to make their buildings sustainable, but there is still no clear framework or comparable labels.
“There was a lot of greenwashing in the last few years, but institutional funds now are a lot more committed and professional”, said Alfred Fink, Partner, TaylorWessing. “The comparability of labels is a real issue, as rules in Germany are different from France, for example, so you have to look at and drill down into every single asset to have a clear idea”.
On the financing side, more and more lenders are issuing green bonds, but there is no agreed definition of what a green bond is, so each institution has to come up with its own rules.
“It’s super complex and every institution has its own set of criteria”, said Cartier-Bresson. “For us at Berlin Hyp an office building in Paris it’s green as soon as the energy consumption is less than 140 KWh per m2 per annum. We don’t claim our criteria are the best, but they are clear and easy to communicate”.
As a German lender, Berlin Hyp has an obligation to determine the ESG rating of each transition and also to ensure that the asset stays green over the life of the loan. It is work in progress, but the combination of EU Taxonomy, individual countries’ rules and companies’ own efforts are leading to real change on the ground. “The good thing is that ESG cannot be done half-heartedly anymore”, said Cartier-Bresson. “It must be done well”.