“At 829,593 sq. m., office take-up at the end of the first half of 2013 has seen a drastic reduction of 19% when compared to that of the first half of 2012” says Olivier Gérard, President of Cushman & Wakefield France. This performance is even 4% lower than that of the first half of 2009, the year of the last major ‘slump’ in the Ile-de-France office market. “The decline in business mark ups, shrinkage of investment and a sharp rise in the unemployment rate have resulted in a lackluster business climate, continuing to sap the energy out of the Ile-de-France market. Major occupiers are less mobile than last year, tending towards a wait-and-see approach and preferring to renegotiate their lease, which allows them to reduce their short-term real estate costs” explains Olivier Gérard. The French real estate market continues to stand up. “6.2 billion euros were invested in france in the first half of 2013 (-2% compared with compared with the first half of 2012). This can be explained by the absence of mega deals, the decreasing share of investments in offices and the fall in the total number of transactions. Some positive trends have nevertheless come to light: there has been an increase in the number of transactions over €50 million, continued demand for retail assets and a more marked interest for core plus or value added assets” says Olivier Gérard.
THE INVESTMENT REAL ESTATE MARKET
6.2 billion euros were invested in france in the first half of 2013
Total investments are therefore down by 2% compared with the first half of 2012 and by 13% on the first half year average of the last 10 years (€7 billion). This can be explained by the absence of mega deals, the decreasing share of investments in offices and the fall in the total number of transactions. Some positive trends have nevertheless come to light: there has been an increase in the number of transactions over €50 million, continued demand for retail assets and a more marked interest for core plus or value added assets.
The sum of €3.2 billion was invested in the 2nd quarter of 2013, following on from the €3 billion invested in the 1st quarter, representing a 6% increase from one quarter to the next. The total amount of €6.2 billion invested in the 1st half of 2013 (HI 2013) is at a similar level to the €6.3 billion recorded in the 1st half of 2012 (H1 2012).
Whilst the number of transactions fell from 196 in H1 2012, to 145 in H1 2013, the number of medium and large sized transactions has increased compared to last year. 25 of the transactions in the first six months of 2013 were between €50 and 100 million (compared with 13 in H1 2012) and 20 of these were over €100 million (compared with 14 in H1 2012).
Whilst the number of sales over €100 million has gone up, their total share has remained stable at 51% in both H1 2012 and H1 2013. Deals over the €100 million mark accounted for €3.2 billion in H1 2013 compared to the slightly higher figure of €3.3 billion the previous year, which can be explained by the fact that no mega deals took place in H1 2013. In H1 2012, however, three transactions of over €500 million took place in Paris.
€4.5 billion were invested in Ile de France in H1 2013, representing 73% of investments compared with 83% in H1 2012. The absence of mega deals and the fall in office sector investments have helped balance out differences across the regions.
The provincial market share has gone up from 17% to 27% over the course of a year. This trend can be explained by the increasing number of sales of large industrial and retail portfolios, including the joint-venture formed by NBIM and Prologis and the shopping arcade and retail park portfolio sold by Immochan and bought by CNP.
Despite having fallen from €4.7 billion in H1 2012, office investments remain the majority asset type, accounting for €4 billion. Their share of total investments now accounts for 64% compared to 75% one year earlier. Whilst deals between €50 and 100 million have played a key role, this has not been the case for larger transactions. 13 acquisitions of office buildings over €100 million went through in H1 2013, for a total amount of €2 billion compared with 12 transactions in H1 2012 for €2.6 billion.
Offices have not only suffered from the absence of mega deals but also from investors being deterred by the general slowdown in the lettings market, the more and more difficult negotiations between landlords and tenants and the increasing vacancy rate in certain key sectors of western Ile de France (La Défense, the Western Business Districts and the South Western Suburbs).
Most office investments in France took place in Ile de France (87%). 28 of the 31 office transactions over €50 million occurred in the Paris region, which explains why offices account for the majority share in Ile de France (79%). High-end assets in the Central Business District (CBD) of Paris remain the prime target for investors, as shown by the acquisition of 42 Avenue de Friedland by Crédit Mutuel Assurances and the purchase of several mixed-use assets including 8 Place Vendôme acquired by Sofaz and 21 Avenue Kléber acquired by an Asian fund. However, this market segment offers very little in the way of supply, which can explain the growing share of investments in other types of assets, whether they be buildings which require redevelopment in the main business districts of Paris and the Western Suburbs (Tour Mirabeau in Paris 15th bought by Gecina or Tour Pacific in La Défense acquired by Tishman Speyer) or new, securely let office properties in “emerging” sectors in the inner suburbs (Okabé in Kremlin-Bicêtre or Porte du Parc in Saint-Ouen, both bought by Primonial Reim).
With €1.5 billion of investments since the beginning of 2013, representing 24% of all property investments in France, retail property sales are up by 25% on H1 2012 and by 50% on H1 2011. This can be put down to the increase in large retail investments, with 9 transactions over €50 million recorded in H1 2013 compared to just 4 in H1 2012.
High street shops have remained highly sought after, demonstrated by the sales of mixed buildings (118 Avenue des Champs-Élysées), luxury boutiques (Tiffany & Co and Harry Winston at 6 Rue de la Paix) and stores let to prestigious retailers located on the main high streets of Paris (COS at 60-62 Rue de Passy, Levi’s and Tissot at 76 Avenue des Champs-Élysées).
However, the growing number of sale and leasebacks (Vivarte portfolio) and a few sales of large shopping centres or retail parks in both Ile de France and the provinces, have helped boost retail volumes. The sale of the Val Thoiry shopping centre in the Ain by Vastned to Eurocommercial Properties is an example of the opportunities which can be created by property companies looking to re-centralise their property holdings and selling off assets.
Industrial assets accounted for 12% of all investments recorded in H1 2013, i.e. €748 million. This volume has increased dramatically, up by 91% on H1 2012. However, the figure is down by 21% on H2 2012 when Blackstone and Segro bought 3 logistics portfolios for more than €600 million.
Logistics warehouses continue to drive the industrial market. The joint-venture formed by Prologis and NBIM and the sale of 370,000 sq.m of warehouse space by Icade to Apollo Real Estate accounted for 56% of investments in industrial assets in H1 2013. Other transactions are relatively few and far between but mainly concerned new and large logistics platforms located on the north-south logistics hub (the Norbert Dentressangle logistics platform in the south of Ile-de-France sold to Argan, the Maisons du Monde platform near Marseille sold to Tristan Capital Partners and the Darty platform near Lyon sold to AG Real Estate).
French investors accounted for 63% of property investments in France in the first six months of the year. They were mainly represented by OPCIs and SCPIs which have significant funds available and which continued to boost the office and retail markets in Ile de France and the provinces. Property and insurance companies also contributed, albeit to a lesser extent.
Foreign investors made up for 37% of the volumes invested, confirming their continued appetite for the French market. Indeed, investors from overseas accounted for half of the transactions over €100 million to have occurred in H1 2013. These acquisitions have a very varied profile and seem to be attracting a diverse selection of international investors. Whilst some transactions have been carried out by newcomers to the French market, notably Asian investors for the most attractive Parisian assets (Sofaz), others have been carried out by American or German investors (e.g. Tishman Speyer and Deka who have been present for some time in France) or by opportunistic players who were active in the 2000s, who have made their come-back (e.g. Blackstone and Apollo Real Estate). As a general rule, French and international investors seek to maximise their exposure to opportunities provided by vendors driven by the requirement to reduce debt level (e.g. Crédit Agricole and Risanamento), by overseas funds looking to reposition their property holdings (e.g. Ivanhoe Cambridge) or even by certain property companies specialised in all types of property (e.g. Klépierre, Icade and Vastned).
THE OFFICE REAL ESTATE MARKET
Take-up general trends
With 829, 593 sq. m. of office space let or sold to occupiers in Île-de-France in the 1st half of 2013, take-up is showing a reduction of 19% compared to the 1st half of 2012. This decline can be attributed to the less decisive role played by large transactions. Accounting for 40% of total take-up at the end of the 1st half of 2013 (50% a year ago), 32 transactions were for areas > 4,000 sq. m. totaling 328,529 compared with 40 transactions totaling 511,876 sq. m. in the 1st half of 2012.
The 36% drop in the volume of take-up for areas > 4,000 sq. m. can be explained mainly by the absence of large-scale projects, whilst the two projects Thalès in Vélizy and Orange in Châtillon totalled almost 120,000 sq. m. in the 1st half of 2012.
The reduction in the volume of transactions for areas < 4,000 sq. m. is much steadier (-3%).
Available supply within 6 months
With 4,140,228 sq. m. available at the end of 1st half 2013 (with a vacancy rate of 7.8%), available supply has risen by 10% year on year. The trend towards an increase in supply became more apparent in 2013 with the arrival of large new-redeveloped buildings on the market, in particular in already well-endowed sectors such as Boucle de Seine, the Southwestern suburbs or La Défense.
If the volume of supply has stabilized in Île-de-France in Q2 2013 (up 1% when compared to Q1 2013) a decline is unlikely in the coming months when we take into consideration the lowering of demand, the release of second-hand properties and the marketing of large new-redeveloped assets, particularly in La Défense. La Défense has seen a marked change, with 422,136 sq. m. available at the end of 1st half 2013 (with a vacancy rate of 12%), an 89% increase year-on-year.
Future supply > 10.000 sq.m.
Trends in future property supply show an abundance of real estate solutions in 2013 (1.2 million sq. m.). This situation explains the rebalancing of power between lessors and lessees and the opportunistic manoeuvrings of occupiers who benefit from favourable negotiation conditions in order to reduce their real estate costs. In 2014 the volume of supply will be in theory less important, yet inflated by a share of the stock not let in 2013 because of the slowdown in demand. The volume of future supply is very unequally distributed, 47% concentrated within three relatively close and competitive sectors in the west (La Défense, WBD, Southwestern suburbs). This scarcity should on the flip side persist within Paris proper, which only account for 17% of total future supply projected for 2015 in Ile-de-France.
Office market updates for the month of June 2013
Two deals > 4,000 sq. m. have been recorded in Paris in June, amounting to a total number of only 8 large transactions (3 of which in Paris CBD) registered in the French capital in the 1st half of 2013. This figure, virtually a third of that of the 1st half of 2011, accounts for the poor performance of the Parisian market since the start of the year , with a total take-up declining by14% year on year. The public sector accounts for 33% of total take-up > 4,000 sq. m. since the start of the year in Paris proper, thus limiting the decline of the Parisian market thanks to significant transactions (BPI on 10,500 sq. m. at 6-8 bd Haussmann, Paris 9th), the need to continue the rationalisation of state-owned property (Rectorat de Paris on 15,000 sq. m. in Visalto, Paris 19th) and to the important activity of certain players. After the leasehold transaction of 3,700 sq. m. in Equation (Paris 18th) and of 4,300 sq. m. at 3-5 boulevard Diderot (Paris 12th) Pôle Emploi just let 5,260 sq. m. in Reflex (Paris 15th). This relative dynamism separates sectors such as finance or consultancy, of which the low demand – despite certain recent transactions (like DS Avocats in Sixt’In in Paris 16th) – conveys most of all the low number of quality opportunities available to large Parisian occupiers in order to rationalise their real estate.
FORECAST FOR THE FRENCH REAL ESTATE MARKET
“With mounting fiscal and social pressures, increasing interest rates, a depressed job market and harder negotiations between occupiers and landlords, the French investment market is unlikely to improve in the second half of 2013”, concluded Olivier Gérard. However, the relative improvement of the financial markets, the decrease in value of certain asset types in specific business districts and the sales which certain investors will continue to pursue, may help to drive investments in the next few months.