European Outlook – France 10:30 - 11:30

‘Office rents still rising in Paris’

The Covid-19 crisis is having a severe impact on the French real estate market but office rents in central Paris are still seeing double-digit growth, delegates heard at Real Asset Media’s European Outlook: France Investment Briefing, which took place online yesterday.

‘The rental market is an essential driver of investment, especially in the Paris region which is a barometer for the market,’ said Cyril Robert, Head of Research, France, Savills. ‘While take-up has seen a marked decline in the first half of the year, prime rents in the Paris CBD are up 10% on H1 2019 and the average rent is up 8%’.

Take-up in H1 2020 has been 670,000 m2, which means a 40% fall compared to last year. The lockdown in Q2 saw a steep decline, recording the worst quarterly results in a decade.

‘It could have been worse,’ said Robert. ‘Total took up a lease for 130,000 m2 in The Link, a building under construction in La Défense. This one transaction alone accounted for 20% of total take-up in the first half of the year, which is the clearest demonstration of the impact of the crisis’.

Investment volumes in the first half of the year fell by 17% to €11.8 billion, but it’s still above the 10-year average, which is €10,1 billion. However, it’s a tale of two halves: Q1 recorded the best start to the year ever recorded, but then there was a sharp fall in Q2 as the epidemic hit.

‘The slowdown due to Covid-19 could continue in Q3,’ said Robert. ‘This will really show the resilience of the market and the ability to generate new sales’.

Most investment has targeted core assets and central locations as capital looks for quality safe havens in an uncertain climate. Rents in the Paris CBD have increased significantly and reached over €930/m2 in Q2.

The French real estate market is experiencing a flight to quality. ‘In terms of valuations core assets are proving to be a safe haven and they are not being affected by Covid-19’, said Tania Concejo-Bontemps, President, Union Investment Real Estate France. ‘From an investor perspective, I can say that the flight to quality really works’.

In these uncertain times, the market is getting increasingly polarised both in terms of location and assets. ‘If I buy in the CBD I know that I’ll never have an issue letting or selling the asset, but in the suburbs demand, values and rents are more volatile and we’ve already seen some adjustment of values,’ she said.

This divide applies to financing as well. ‘We continue to provide loans but we look to finance properties with the best cashflow guarantees, long leases and strong covenants,’ said Benjamin Cartier-Bresson, Head of Paris office, Berlin Hyp. ‘Until the situation returns to normal there will be a flight to quality’.

Foreign investors are taking a wait-and-see attitude during this period of uncertainty,, leaving the field open to domestic investors, who have been increasing their hold on the market.  In H1 the share of domestic investment has increased to 64% from 47% in the same period last year.

‘There were a few big transactions that have been put on hold during the lockdown and many investors are postponing the final sign-off to next year,’ said Alfred Fink, Partner, TaylorWessing.

It may take quite a while to get to the ‘new normal’. According to a snap poll conducted by Real Asset Media among delegates, a clear majority (59%) believes that investment volumes will only return to pre-crisis levels in December 2021 or later.

‘It will be hard to get back to normal and it will take time,’ said Guillaume Turcas, Managing Partner, Faro Capital. ‘I am pessimistic over the short term but definitely optimistic over the long term’.