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Occupier market beginning to find its form while investment market continues positive trend

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The French real estate investment market performed very well in the first half of the year. “Investment has increased by 72% compared with the same period last year, with €11.5bn Euros invested during H1 2014. The French market has returned to pre-recession levels recording its best half-year performance since 2007”, announced Olivier Gérard, President of Cushman & Wakefield France. This boom is largely due to the completion of three transactions, each over €1bn, which are among some of the most significant ever seen in France. “The changes in the office occupier market are less impressive. Nevertheless, with a take-up of 1,027,094 m², the increase is still 23% year-on-year, which is a rather respectable result considering the difficult economic climate and the sharp increase in demand in Paris and certain other business districts in the west, such as La Défense”, continues Olivier Gérard. 

FRENCH INVESTMENT MARKET

Developments in investment

€7.7bn was invested in the second quarter of 2014, up 133% compared to the average recorded volume for each quarter since the beginning of 2009. This is the best quarterly result since 2005. Following on from the €3.8 billion in the second quarter of 2014 (+ 103%), the French market reached €11.5 billion at the end of the first half, which marks a 72% increase year-on-year, thanks to the completion of several very large transactions. Furthermore, out of the 22 transactions greater than €100 million in the first half of 2014, 8 were greater than €200 million and alone represent 57% of overall investment. Amongst these are three of the most significant transactions ever recorded in France: the acquisition of Cœur Défense by Lone Star, the sale of the Klépierre portfolio to Carrefour and the sale of the Risanamento portfolio to Olayan Group.

The overall number of transactions dropped significantly (156 in the first half of 2014 compared to 208 in H1 2013), displaying a certain weakness in other segments of the market. The volume of transactions under €50 million dropped by 26% year-on-year, whereas transactions between €50-100 million fell more moderately by 6%.

Geographical distribution

€8.3 billion was invested in Ile-de-France in the first half of 2014, which accounts for 72% of the total amount committed in France. The Paris region continues to be dominated by offices, which make up 73% of the total volume. This large share is due to the increase in the number of transactions greater than €100 million (13 single asset transactions compared to 8 in the first half of 2013) and especially the signing of several major deals (Cœur Défense, Risanamento portfolio and the new SFR headquarters in Saint-Denis). The retail sector accounts for a further 22% of investment in Ile-de-France, much more than industrial space, which represents just 5%.

€3.2 billion (+60% year-on-year) was invested in the Provinces, which represents 28% of the volume invested in France. However, this strong performance, boosted by significant sales of portfolios, masks a clear tightening of the market as two transactions greater than €200 million alone represent 59% of this volume (sale of Klépierre portfolio, acquisition of Incity Tower in Lyons).

Office property

At €6.5 billion (+62% year-on-year), offices account for 56% of the total volume invested in France. Out of the 14 single asset transactions greater than €100 million identified in France, 4 deals account for 37% of the total investment in offices: the acquisitions of Cœur Défense, the new SFR headquarters and Tour Incity and the sale of Arc de Seine in the ZAC Rive Gauche of Paris to Allianz.
The Paris Left Bank market performed very well recording several significant transactions (Arc de Seine as well as Le France and Panorama), which contributed to a clear increase of 70% year-on-year in volumes invested in Paris outside of the CBD (€904 million). However, Paris CBD continues to dominate activity with €1.5 billion invested in the first half of 2014, a 42% increase on the same period last year. This result is largely due to the sale of the Risanamento portfolio as the volumes in the most popular districts of the capital are continuously constrained by a shortage of quality supply.
With €1.7 billion of investment, La Défense delivered its best performance since 2007. Although there were three transactions greater than €100 million (e.g. Prisma Tower sold to a Malaysian fund), activity was primarily dominated by the sale of Coeur Defense. This transaction alone accounts for 20% of overall office investment for the entire country. Other significant transactions could be completed in the coming months in La Défense, a market that is benefiting from a significant influx of supply and a gradual recovery of rental activity.
More than €700 million was invested in Hauts-de-Seine (excluding La Défense), where the most significant transactions were for large refurbished office buildings either recently delivered (Les Ateliers du Parc in Clichy) or still in development (Citylights in Boulogne). Significant amounts were also invested in the north of Ile-de-France (€935 million). However, volumes were mainly boosted by the acquisition by Predica and Aviva Investors of the new SFR campus recently completed in Saint-Denis.
Finally, the acquisition of Tour Incity in Lyons alone represents 53% of all office investment in the provinces. 

Retail property

At €4.2bn (37% of the volume invested in France), investment in retail property has increased 133% year-on-year and is higher than the results recorded each year for retail properties since 2008.
Analysis of the market is somewhat corrupted by the impact of two very large transactions: the sales of the Klépierre portfolio and Beaugrenelle shopping centre represent 66% of the overall amount invested in retail since January. Other transactions illustrate the interest of investors for mixed use buildings in Paris (Le Rossini in the Opera district, 49-51 avenue George V or the buildings part of the Risanamento portfolio) and the attractiveness of boutiques located in the most prestigious streets in France (Chanel at 51 avenue Montaigne). Investors are equally present in more common segments, boosted by new shopping centre projects (Nice One) as well as retail parks (Saint-Max Avenue in l’Oise) and sales by property companies/Reits looking to refocus their assets (portfolio of 4 shopping centres sold to KKR/Seefar by Corio).
New major transactions in retail will be finalised by the end of the year which should push the overall investment volume past the symbolic €5 billion mark and break the 2007 record (€4.8 billion).

Industrial property

At €800 million, investment in industrial assets accounts for 7% of the total amount invested in France in the first half of 2014. After a calm first quarter, volumes increased significantly in the second quarter due to the sale of the Loren warehouse portfolio by Foncière des Régions to Blackstone. Several transactions for single assets were also recorded, such as Segro’s acquisition of 120,000 sq.m. let to Maison du Monde in Saint-Martin de Crau.

Types of buyers
French investors are very present in transactions greater than €100 million and provided 60% of the total amount invested in the first half of 2014. Following on from their active role in 2013, insurance companies continue to stand out in 2014, particularly in club deal transactions (SFR headquarters in Saint-Denis bought by Predica and Aviva Investors). However, their share has decreased since last year because of the completion of several sales to occupiers (Chanel on avenue Montaigne, Klesia in the ZAC Clichy Batignolles) and, especially, acquisitions by property companies/REITs and private investors of two large retail deals (Klépierre portfolio, Beaugrenelle).
Foreign investors have been responsible for 40% of the volume invested in France since the beginning of the year. North-American investors were particularly active (19% compared to 8% last year). Although they have a relatively varied profile, these investors have primarily focused on buying office space, retail space and warehouses with the potential for significant repositioning. The share of Middle Eastern investors increased significantly in the second quarter due to the acquisition by the Olayan Group for the majority of the Risanamento portfolio. They now account for 9% of acquisitions made in France. German funds were also active (6%) favouring mixed-use buildings or prime offices (Arc de Seine bought by Allianz).

 

Investment Volumes in France_H1 2014

 

 

OFFICE OCCUPIER MARKET IN ILE-DE-FRANCE

23% increase in take-up

At 556,315 m², take-up in Q2 2014 is slightly higher than it was in Q1, breaking the 1 million m² barrier during H1 (1,027,094 m²). Although less than the 10-year average (1,079,403 m²), this year’s take-up is 23% higher than for the same period in 2013, a respectable performance considering the lack of visibility for businesses and a stagnant employment market. Nevertheless, the difficult economic climate continues to affect the office market, where the total number of transactions has been continuously falling since 2011 reflecting the fragility of the market for small and medium-sized lots.

Activity continues to be driven by large, quality buildings

The return to form of the office market is especially evident in the volume of major transactions. Although the change in the number of transactions larger than 4,000 m² is rather insignificant (36 this half compared to 32 in H1 2013), there is a clear increase of 53% in investment volume due to the completion of several very large transactions. 5 transactions, all larger than 30,000 m², totalled 202,468 m² whereas there were no transactions of such magnitude in H1 2013. Three of these were completed in the past three months: KPMG in Tour Eqho in La Défense, Solocal Group in Ctylights in Boulogne-Billancourt and L’Oréal in Ecowest in Levallois-Perret.
This change in demand proves the importance of real-estate as leverage for managerial efficiency, not just in terms of occupancy costs. In fact, team productivity, corporate image and client proximity are subject to a more systematic analysis in order to benefit from relocating, limit any hidden costs and consider the impact of staff representative bodies. Major tenants, attentive to workspace quality and managing their expenses, prefer new/redeveloped buildings (68% of take-up > 4,000 m² in H1 2014). However, as shown by certain major leases (Clifford Chance at 1-5 rue d’Astorg in Paris 8th, SNCF/Geodis in Espace Seine in Levallois, etc.), renovated buildings are equally sought after. Such assets in markets with limited new supply indeed provide real alternatives for companies looking to reduce their costs without compromising on quality and location.

Prime transactions in established markets of Ile-de-France
Major tenants, aware of the quality of the surrounding neighbourhood and accessibility, also favour established business districts with good transport links: Paris and Hauts-de-Seine account for 32 of 36 transactions > 4,000 m² in H1 2014. Although the success of these two major markets is, more or less, due to an influx of quality properties, tenants are not motivated by the same drivers. In Paris, the boost in demand reflects the desire of tenants in prime neighbourhoods to take advantage of redevelopments in order to optimise their real-estate assets while maintaining a sought after address. In the west of Ile-de-France, the upturn in activity is mostly related to large companies taking advantage of more generous leasing conditions set by landlords looking to avoid vacancy in their portfolio.
Inner Paris recorded a 24% increase in take-up year-on-year (352,352 m²), its highest H1 figure since 2011. The market slowdown for small and medium-sized transactions is largely compensated by the increase in the number of transactions greater than 4,000 m² (14 transactions for a total of 126,197 m² compared to 8 for 61,519 m² in H1 2013). Although less active in 2013, some traditional tenants in the CBD, such as advisory firms, are now particularly distinguishable, accelerating their decision processes to benefit from quality redeveloped properties (Cheuvreux Notaires at 55 boulevard Haussmann, McKinsey & Company at 90 avenue des Champs-Elysées, DLA Piper in Laffitte-Lafayette). However, some tenants left the CBD for quality real-estate opportunities well located on the left-bank (Salesforce at 3 avenue Octave Gréard in the 7th, La Française at 128-130 boulevard Raspail in the 6th) or motivated by the opportunities to reduce their real-estate costs (Fromageries Bel to Suresnes, Groupon to La Défense). Three years after letting 35,000 m² in Le Lumière (Paris 12th), the Ministry of the Interior has recently let 26,200 m² in le Garance (Paris 20th), which confirms the trend of administrators relocating their services to less expensive neighbourhoods while maintaining a Parisian address.
101,248 m² was let in H1 2014 in La Défense, which represents a 53% increase year-on-year and a greater volume than the overall volume recorded in 2013. Large transactions once again played a leading role: 5 transactions larger than 4,000 m² account for 69% of take-up in La Défense compared to 53% in 2013. Confirming the advantages of an abundant, diverse and quality offering, these transactions illustrate the retention capacity of the business district with companies looking to expand (Ernst & Young in First) or to consolidate their employees while modernising their real-estate assets (KPMG in Eqho). They are also testament to the growing appeal of La Défense for companies from other geographical sectors looking for a prestigious, energy efficient and quality base (Thalès in Carpe Diem) or flexible, well-located and affordable real-estate solutions (Tarkett in Tour Initiale).
With a take-up of 200,190 m², 61% > 4,000 m², the WBD recorded its best H1 since 2008. This performance is due to the strong market in Levallois-Perret: after SAP let 28,000 m² in So Ouest in 2013, almost 90,000 m² has already been let in Levallois-Perret in H1 2014, including large blocks that are under construction (L’Oréal in Ecowest) and large renovated headquarters (SNCF/Geodis in Espace Seine). The report is equally positive for the South West, with 92,554 m² let, representing a year-on-year increase of 9%. This increase is largely thanks to the lease of large new areas in Boulogne-Billancourt, a particularly well supplied market. Solocal Group should also consolidate its teams on 34,000 m² in Citylights. The South West also recorded several transactions for mid-sized areas confirming the gradual absorption of new supply completed many months ago (Aurélium, Horizons and Etik in Boulogne, Eqwater in Issy les Moulineaux).

Struggling emerging markets The return to form of the more established business hubs contrasts with the sluggishness of emerging markets in Ile-de-France (Nord, Est, Sud, Boucle de Seine). Only two transactions larger than 4,000 m² have been recorded since the beginning of the year: 45,000 m² for Veolia Environnement headquarters – a long-term project – and the extension of GDF in Euroatrium in Saint-Ouen. A sharp rebound in activity seems unlikely in H2: these markets are suffering from a limited number of short and medium-term opportunities for large new buildings and as a consequence will continue to be largely animated by transactions for small and medium-sized floor areas. Emerging markets are equally affected by competition from more established neighbourhoods that are more attractive due to adjusted rents and measures designed to support tenants, which attract the interest of companies looking for a more prestigious and accessible address.

Stabilisation of the volume of available supply
With 4,423,161 m² available within 6 months at the end of Q2 2014 in Ile-de-France (vacancy rate of 8.3%), the volume of supply increased 7% year-on-year but is stable compared to the previous quarter. Although this stabilisation was helped by the increase in demand, its impact was relatively limited. In fact, several leases for large new floor areas, prelet by tenants to benefit from more favourable lease conditions, did not affect existing supply (Nuovo in Clichy, Ecowest in Levallois, City Lights in Boulogne, Le Garance in Paris, Neopost in Bagneux, etc.).
However, some submarkets saw their quality supply decrease more or less significantly. This is particularly the case in La Défense: although the vacancy rate is still high (14.5%), the volume of new/redeveloped available supply larger than 4,000 m² fell by 6% over a quarter despite the arrival of the D2 tower on the market. The change in the CBD is even greater, where volume fell by 37% compared to Q1 2014. Considering the magnitude of ongoing negotiations in the CBD, the increasing scarcity of supply should continue in H2 bringing a power shift in relations between landlords and tenants for refurbished or redeveloped buildings.

 

Office Take-Up in Ile-de-France_S1 2014

 

OUTLOOK

The weak recovery of the French economy and the relatively long duration of negotiations quash hopes for a general improvement of the offices market in H2. That said, the 1,000,000 m² take-up mark could be passed once again. “The Parisian market will remain dynamic whereas the easing of leasing conditions in the first-ring suburbs will continue to work in the favour of large new and renovated buildings in the West. The latter respond to the rationalisation goals of tenants looking to modernise their property at the lowest cost and, for some, to find a better location », explains Olivier Gérard. Although the economic, regulatory and tax climate is far from ideal, activity should continue to be supported by the investment market. Olivier Gérard concludes, “although mega-deals will probably be less numerous than in H1, several major transactions will be completed in H2. Investment volumes for the whole of 2014 should therefore reach levels unseen since the beginning of the crisis”.