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Cause to hope ?

Olivier Gérard, Président of Cushman & Wakefield France, announced that, “Only 1,211,061 sq.m. of office property has been let or sold to occupiers in Ile de France since January, a fall of 18% year on year. This confirms that 2013 will not be a great year for the rental market.” The economic climate is still unfavourable: fiscal pressure persists, the businesses’ financial position is tense and unemployment, at its highest level, has still has not started to decline. The investment market is faring better. Olivier Gerard comments that, “with 10.3 billion Euros invested at the end of the 3rd quarter in France, the investment market is showing a rise of 2% compared to the same period in 2012”. This healthy position can neither be entirely attributed to the acquisition of prime Parisian properties, nor to the completion of a few large-volume transactions. This is a symptom of a rebalancing of the market in which activity is upheld by the weight of the available capital to deploy and the adjustment of pricing on non-core assets. However, the investment market does not have a complete bill of health. Olivier Gérard explains that, “investors are wary of potential interest rates changes and remain cautious about the lack of economic visibility and a depressed rental market. This particularly applies to international investors who, as part of their allocation strategies, are carrying out a detailed analysis of the property market of world capital cities”.


THE FRENCH INVESTMENT MARKET

Changes in investment size
The dynamism of the French investment market continued in the 3rd quarter with 3.9 billion Euros invested, an increase of 14% compared to the previous quarter (3.4 billion Euros) and almost 30% compared to the 1st quarter of the year (3 billion Euros). This revival of activity has added 10.3 billion to the total volume invested in France so far this year, a level 2% higher than that of the previous year during the same period.

 

The increase in investment volume has been accompanied by a 22% fall in the total number of deals (243 vs. 310 one year before) mainly linked to a reduction in the number of transactions smaller than 50 million Euros. The category of properties 50-200 million Euros remains the most active, with 54% of involvement versus 38% over the same period in 2012. The share of transactions between 100 and 200 million Euros makes up 30% of total investment volume. Finally, it should be noted that the three most significant transactions of the year (Adria tower in La Défense, Eco-Campus Orange in Châtillon, Sequana in Issy-les-Moulineaux) were all completed this summer.

Invested amounts according to asset type The office sector accounted for 7.2 billion Euros, which represents 70% of the total invested volume in France compared to 63% at the end of the previous quarter. 9 office transactions of more than 100 million Euros were finalized in the 3rd quarter of 2013 in the Paris region, representing a number that is equal to the entire first half-year total.
Retail, with 2.1 billion Euros invested, has declined by 7% year-on-year and now is “only” at 20% of the invested amount in France (25% at the end of the 2nd quarter). After an active 1st half, large transactions were few and far between in the 3rd quarter (3 transactions above 50 million compared to 10 in the first half).

The industrial sector makes up 10% of the total amount invested in France at 1 billion Euros, slightly higher than that of the same period last year. After the disposal of large logistics portfolios in the 1st half, the 3rd quarter was quieter, with activity mainly demonstrated by Blackstone’s acquisition of the Quartz portfolio for 38 million Euros.

Geographical distribution of investments In Ile-de-France, €7.8 billion Euros were invested in the first three quarters of 2013 (stable over the course of a year), representing 76% of the total investment volume in France.

The office sector represents 83% of the 7.8 billion Euros invested in Ile-de-France, compared to 78% in the corresponding period of the previous year. The rise in the market share of the office sector is due mainly to some very large-volume transactions and significant capital deployment in Paris’s inner suburbs. In fact, with the exception of two office transactions of more than 100 million Euros (32 rue Marbeuf, Paris 8th arrondissement and Spark, Paris 13th), activity these last three months has been more concentrated upon assets located outside Paris.

If the appetite of investors for mixed-use or redeveloped buildings in the capital remains strong, the market benefits from a more marked interest from certain investors for non-Parisian assets, which are generally of a less secure profile. This change has been demonstrated recently by the sale of partially vacant buildings (Viva in Malakoff) or those situated in the heart of office sectors whose lettings markets have recently experienced lower activity (Adria tower in La Défense).

All office transactions higher than 100 million Euros carried out outside of Paris during the 3rd quarter were in Hauts-de-Seine. Several of them involved buildings situated in the heart of well-established office zones (such as Technopôle de Meudon and Sequana in Issy les Moulineaux, both occupied by Bouygues Telecom). Other less established districts in Hauts de Seine offering quality supply (recent, new or under construction) and long leases (Atrium in Gennevilliers, Orange’s Eco-campus in Châtillon) have also been active.

Lastly, even though there were no transactions completed for more than 100 million Euros in Paris’ northern suburbs in 2013, this geographical subsector played host to 7 transactions higher than 50 million Euros, 4 of which were finalized this summer (Kappa in Saint-Ouen, Olympe in Saint Denis, etc.) demonstrating this markets appeal amongst large tenants and with good transport links.
In the provinces, 2.5 billion Euros were invested in the nine first months of 2013, a rise of 8% year-on-year. This increase is due to the sale of a number of retail portfolios and, on a smaller scale but worthy of note, some significant transactions in the industrial and office sectors, predominantly in the Rhône-Alpes region (e.g. the Tase building in Lyons).

Main investors The French are responsible for 68% of investment volume in France so far this year compared to 57% for all of 2012 and for 7 of the 10 transactions of over 100 million Euros in the quarter (Adria tower, Eco-campus, Technopôle de Meudon, etc.). OPCI (collective property investment institutions) and SCPI (listed property companies) such as Primonia Reim, La Francaise AM, Amundi, etc, insurance companies (e.g. Crédit Agricole Assurances) and property investment companies (e.g. Gecina) remain, in this order, the most active French investors.

32% of the investment volume in France was undertaken by foreign investors. The latter are principally represented by the North Americans (32% of foreign investments) and the Germans (18%). North American investors (Tishman Speyer, Blackstone, Apollo, Hines) have first and foremost targeted industrial or office assets, offering the possibility of higher yields than the “core” sector. The Germans (Deka, Pramerica) have mainly leaned towards retail assets or mixed-use buildings situated within Paris itself

ILE DE FRANCE OFFICE RENTAL MARKET

Trends in take-up
The last few months have not seen a reversal in the trends that have been observed since January in the Ile de France office market. Totaling 1,211,061 sq.m. at the end of the 3rd quarter 2013, take-up has fallen by 18% year on year and 25% compared to the same period in 2011. The uncertain business climate encourages a more cautious approach from occupiers, drawing out decision-making and encouraging many large companies to opt for a renegotiation of their lease rather than vacating; a small amount of mobility with which we can measure the impact on rental activity, at a large 30% reduction in the number of transactions above 4,000 sq. m. At only 43 (62 a year previously) these transactions total just 483,047 sq.m., the lowest volume recorded for the end of Q3 in the last 10 years.

Even if it cannot make up for the decline in the number of transactions of large properties, the resilience of the small and medium-sized property sector nevertheless limits the fall in total take-up. Thus, the volume of transactions of properties smaller than 4,000 sq. m. only saw a fall of 8% compared to the previous year. The category of transactions between 1,500 and 4,000 even saw a rise of 8%.

Features of take-up Large transactions in the Paris region remain first and foremost driven by occupiers wanting to reduce their real estate costs, a trend which is illustrated by the 71,000 sq.m. extension of the Crédit Agricole site in Montrouge (Eole building). Above all anxious to preserve their profitability, many businesses combine this objective with modernizing their offices, giving them the possibility to better manage their charges, optimize the properties they occupy and, in some cases, improve their image.

New/redeveloped properties remain very sought-after by occupiers. These properties make up 74% of the total volume of take-up over 4,000 sq. m. at the end of the Q3 2013 (67% out of the total for 2012). They also represent virtually all significant activity over the last few months, be them turnkey schemes or pre-let properties (Ericsson for 12,843 sq.m. in Helios à Massy) or new properties launched speculatively and only let, in some cases, many months later (Orange on 24,695 sq. m. in Eastview in Bagnolet). Their gradual absorption is indicative of more favourable lease conditions, put to profit by businesses in order to streamline their portfolios. Changes in market conditions also benefit the leasing of renovated or good-quality second-hand properties, largely situated in well-established tertiary areas with good public transport access (SCA Hygiène Products on 6,637 sq.m. in Eurosquare 1 in Saint-Ouen).

The priority given by companies to cost-cuttings explains the opportunistic activity seen in some sectors that have seen in a take-up rise year-on-year. This is the case for Boucle de Seine, (+ 7%) and for the East (+ 19%) where the renewal of activity can nevertheless be put into perspective by the poor take-up last year or by the significant weight of some transactions (Orange in Bagnolet). There is also positive change in La Défense (+ 67%) indeed with some large-scale transactions (ERDF in the Blanche Tower) and multiple leasings of medium-sized properties, presenting solutions that are as practical as they are good value for occupiers who are already present in the office district. With the notable exception of La Défense, take-up has fallen in all established tertiary sectors in Ile de France (Paris CBD, Western Business District, South Western Suburbs). Nevertheless, it makes sense to distinguish between these sectors that have the most supply (Western Business District, South Western Suburbs) – which can notably suffer from disagreements between lessors and occupiers – out of the Paris central business district. Therefore, the significant drop in the volume of transactions for properties more that 4,000 m² (-36% year on year) in the CBD here leads to above all the lack of new/redeveloped properties available, rather than a loss of appeal, its best available properties being general rapidly absorbed or pre-let (Hermès for 5,525 sq.m. on 10-12 rue d’Anjou).

Trends in available supply
The volume of supply has continued in its rise in Q3 (2% compared to the end of the 1st half) under the effect of the decrease in take-up, the release of second-hand space and the completion of large speculative schemes, in the west of the region in particular. Up by 8% year on year, available supply within 6 months now totals 4,215,110 sq. m. which is the highest volume ever seen in Ile de France. As for the vacancy rate, it has reached 8% at the end of Q3 compared with 7.4% one year previously.

The volume of available supply will not fall significantly over the next few months. Thus economic forecasts will not give us cause to hope for a swift and widespread acceleration in demand. Beyond this, new projects will be delivered right through 2014, in the short term increasing the competition between tertiary areas to attract large occupiers who are currently active on the market. In this context, the adjustment of rental values and the granting of more significant incentives will remain key element, playing a decisive role in securing new lettings deals.

Central Paris should also see a regain in demand, linked to the work starting on a higher number of sites, mainly in the form of redevelopment projects in Paris CBD (e.g. 3-5 Friedland). This could progressively increase the share of new/refurbished properties within the capital’s total supply (19% at the end of Q3 2013) but they will undoubtedly not allow for a rebalancing of the Parisian market, as a whole, in the short-term. The sustained demand in the luxury goods and Internet sectors and the extra possible activity from traditional players such as the public sector means that there is a fairly quick absorption of projects that can be delivered over the next 2 years. The most qualitative available properties will, however, have a test value acting to maintain prime rent at high levels, above 800 €/sq.m./year.

OUTLOOK
The 4th quarter of 2013 will confirm the fall in take-up compared to the previous year, even if large transactions could still be concluded. Olivier Gerard explains that, “we will have to come back in line with demand levels which are close to those of the end of 2011, 2006 and 2007 – three of the most active periods of the decade – to reach at least the threshold of two million sq. m. let or sold to occupiers over the whole year. However, if some signs of economic revival can be seen, the improvement of conditions is still too slight to create a favorable environment for sustained take-up of office premises”. A slight revival of activity could still come about over the next few months, thanks mainly to the increased flexibility of lease conditions in the suburbs and to the arrival of new good quality properties on the Parisian market. This will mean available supply on the market corresponds more closely with the criteria looked for by occupiers, reinforcing the attraction to new, redeveloped and renovated properties and therefore accelerating the finalization of deals. Olivier Gerard concludes that, “the investment market has, for several months, benefited from an improved and speedier decision making process (i.e. a movement away from the “wait and see” attitude that has impeded the sector) and from a greater fluidity of available product. This positive evolution underlines the sustained and improving performance year-on-year, appointing towards an investment volume in 2013 that will probably be similar to that of 2012”.