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Mixed quarterly results for the office lettings market, but the investment market remains lively

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Cushman & Wakefield reviews the French commercial-property market at the end of the third quarter of 2014

“At 16 billion euros, investment in France at the end of the third quarter of 2014 was up sharply, by 45% year on year and already 5% more than investment in all of 2013,” stated Olivier Gérard, President of Cushman & Wakefield France. Although there were no mega-deals finalized in the third quarter of 2014, large transactions continued, thereby confirming the appeal of the French market to both domestic and international capital. The office lettings market in Île-de-France, more closely correlated to the economy, slowed slightly in the third quarter after a vibrant end of the first half. “In the third quarter, 390,779 m² of office properties were let or sold to occupiers. This brought take-up since the beginning of 2014 to 1.43 million m², an increase of 18%, compared with the same period in 2013. Nonetheless, this result was below the average performance of the past ten years,” added Olivier Gérard.

PROPERTY INVESTMENT MARKET IN FRANCE

Investment activity up by 45% y/y

€3.6 billion were invested in France in Q3 2014. This represents a 58% decrease in relation to an exceptional Q2, marked by the sale of the €2.1 billion Klepierre portfolio to Carmila*. In total, €16 billion have been invested in France since January, an increase of 45% in relation to the same period in 2013 (€11 billion).
At €12.1 billion (+46% on last year), the Paris region represents 76% of the entire volume invested in France at the end of Q3 2014. 27 of 29 transactions over €100 million (excluding portfolios) were recorded in the Paris region and the large majority of total investments were foreign investments (86%). €3.9 billion were invested in the Provinces; a 44% increase on last year. This dynamism relates to the sale of several portfolios, which account for 62% of investments made outside Ile-de-France.

The increased number of large operations has offset the 20% fall in the number of transactions

Transactions over €100 million have increased since the beginning of 2014: to 36, including portfolios (as opposed to 27 during the same period last year), representing 72% of the total volume invested in France. Among such large transactions, the sale of portfolios were particularly numerous and totalled €4.8 billion or 30% of capital invested. The increase of large operations is due to the influx of French and foreign capital. Low interest rates and a high risk premium have rendered real estate particularly attractive to large investment fund managers. In addition, credit is readily available, including for value-added assets, resulting in a larger number of investors able to acquire real estate.

The increased number of large operations has offset the 20% fall in the number of transactions (255 at the end of Q3 2014 against 317 one year ago). The 36% drop in the number of transactions valued between €50 and 100 million is mainly linked to a shortage of available stock. There is a greater decrease in investments for assets valued between €5 and 15 million (-42%). This segment of the market, narrower and principally driven by French investors, is further penalised by less dynamic letting activity outside the Paris Region

Investors from very diverse nationalities and profiles

French investors continue to lead, with 60% of the total volume invested in France. Maintaining recent trends, insurance and property companies are behind some of the largest transactions carried out in 2014 (SFR Campus sold to Predica and Aviva Investors, the Klepierre portfolio to Carmila, etc.). Capitalising on substantial inflows, SCPIs (Primonial Reim, Unofi, Ciloger) remain major players, while other types of French investor are also present e.g. private investors (Beaugrennelle) or owner-occupiers (BRED at Joinville-le-Pont and, more recently, SMABTP in the 15th arrondissement of Paris).

Foreign investments total 40% of the volume invested in France since January. Showing an interest in all types of properties, foreign investors are made up of very diverse nationalities and profiles. Americans have the strongest presence in acquisitions: traditionally active within the large operations sector, targeting assets with high value-added potential, they have been relatively discreet during Q3. Interest in the French market from other North American players has also recently materialised in the form of the first acquisition carried out by Canada’s Oxford Properties (32 Blanche). Europeans are mostly represented by German funds which, very selectively, have primarily targeted Parisian office buildings. New entrants from Europe have also emerged, such as Netherlands’s Syntrus Achmea who recently acquired a portfolio of boutiques sold by Grosvenor. Finally, Middle Eastern investors continue to target high-end properties in Paris, as illustrated by the sale of the Risanamento portfolio to the Olayan Group associated with Chelsfield.

Certain investors have modified their approach with regards to the duration of holding periods; competition between purchasers for quality assets has encouraged them to accelerate the rotation of their properties. Some properties have been arbitrated by German funds while many renovated Parisian assets have been put on sale by opportunistic American funds (Le Madeleine sold by BlackRock or 32 Blanche, sold by Carlyle). The market has equally benefitted from the willingness of certain investors to restructure their holdings in favour of retail (Klepierre, Unibail-Rodamco) or office assets (Gecina).

€9.9 billion invested in offices in France

€9.9 billion have been invested in offices in France since the beginning of 2014 (62% of the total investment volume in France), representing an increase of 33% year-on-year.

The Paris Region has captured 93% of volumes invested in offices in France, a total of €9.2 billion, of which €2.5 billion focused on the Paris CBD. During the 3rd Quarter, the Paris CBD has benefitted from the sale of mixed-use properties (Le Madeleine) and groups of refurbished offices (32 Blanche, L’Astorg). The ZAC Rive Gauche is the other leading business sector in the capital, with €720 million invested since the beginning of 2014. This volume should increase during Q4 with the completion of a new €100+ million transaction which will exceed the symbolic threshold of one billion Euros in 2014 and break the historic 2004 record of around €800 million.

After a dynamic first six months, no major transactions have been recorded this quarter in La Défense. However, other office submarkets have remained active. With more than €1.2 billion invested since January (+118% on last year), the Northern suburbs has recently seen the sale of Spallis and Dyonis, following the acquisition in Q2 of the SFR Campus in Saint-Denis for €680 million. The recent sales of campuses have further inflated volumes in other geographical Parisian regions in Q3, e.g. the purchase of a new headquarters for Carrefour in Massy by Predica and the sale of 80% of the Campus Cristal at Gennevilliers (Thales) to Crédit Agricole Assurances/EDF Invest. The performance of the office market outside of the Paris Region has been more muted: of the mere €750 million invested since January (the figures remain stable in comparison with last year), more than half in the Lyon market alone.

Retail investments at their highest levels

So far, 2014 has been an exceptional year for retail. At €4.9 billion, retail represents 30% of the total amount invested in France as at the end of Q3 2014, breaking the 2007 record (€4.8 billion). While large company reorganisations have swept through the sector (the merger of Corio/Klepierre, the creation of Carmila, etc.) the retail market has benefitted from an influx of quality available stock, which explains the high number of large transactions. Of the eight transactions valued over €100 million that have taken place since the beginning of the year (against seven in 2013), three are superior to €200 million (Beaugrenelle and the Klepierre and Risanamento portfolios).

The most celebrated French streets are particularly popular with foreign investors, as illustrated by the sale of a portfolio of shops in Paris, Toulouse and Bordeaux to Syntrus Achmea. Rather frequent during the first 6 months of 2014, the sale of galleries and shopping centres has been almost non-existent in Q3 2014. The decline should however be temporary; Carmila is negotiating with Unibail-Rodamco for the purchase of six centres for around €930 million. Finally, some transactions have animated the retail park market (Le Brayphin at Rambouillet, Le Parc de La Plaine at Saint Bonnet de Mûre), however the sector remains less active due to the high selectiveness of investors and the limited amount of high-quality stock available for sale.

The French industrial sector has performed relatively well

With €1.2 billion invested, the industrial market is up by 7% in comparison with the same period in 2013. Sales of portfolios, especially pan-European, have continued to animate the market during Q3 2014; e.g. the acquisition of an industrial portfolio by MStar Europe or the acquisition by Blackstone of the Curve portfolio from SEB Immobilien Investment. The industrial market continues to benefit from its globalisation, and more specifically, from the strong presence of North American investment funds.

At €718 million (60% of total investments), the logistics sector continues to benefit from high investor appetite for large new platforms or well let class B assets. The light industrial segment is particularly dynamic in relation to the previous year, with an increase of 82% of capital invested. Among the most significant Q3 transactions, is the above mentioned MStar’s acquisition of the Phoenix portfolio for €97 million.

 

LETTINGS MARKET FOR OFFICE PROPERTIES IN ÎLE-DE-FRANCE

Mixed results in the third quarter

Since the beginning of 2014, 1.43 million m² of office properties have been let in Île-de-France. Although solid activity in May and June closed the first half on a positive note, lettings have since slowed considerably. The year-on-year trend is still positive, but growth in take-up is now only 18%, compared with the same period in 2013, when growth at the end of the first half stood at 24%. Only 390,779 sq. m. of office properties were let in the third quarter, 31% less than in the second quarter. After a quiet summer, the month of September—traditionally a lively period—did not see the return of robust activity.

Despite a 10% increase year on year, the total number of transactions remains modest, reflecting the troubled market in small and medium-sized office properties. Nevertheless, the downturn in the third quarter was attributable to the decline in the largest transactions, the very category that had driven the office market in 2014 thus far. Only three deals of more than 10,000 m² have been finalized over the past three months, for a total of 51,000 m², 73% less than the eight deals in the previous quarter.

The slowdown in market activity in Île-de-France is due more generally to the weak economy. Although some market participants were hoping at the beginning of the year for more rapid improvement, the economy is not expected to improve before 2015. Negotiations have also grown longer in the past few months and often fail because of landlords’ reluctance to offer adequate incentives to attract occupiers. Other factors can slow decision making, such as the uncertainty surrounding the Pinel law (inventory of service charges, taxes, duties, etc.), which was adopted last June but whose implementing decrees have not yet been announced.

In search of better value for money

Occupiers wishing to benefit from the wide range and quantity of assets available on the market have requirements that have rendered the market even more competitive. The winners are areas and assets that provide the best value for money. This trend is not limited to new and redeveloped properties. Although such properties still account for the majority of take-up volume greater than 4000 m², their market share continues to decline (66% at the end of the third quarter in 2014, compared with 74% a year earlier). Several new leases of refurbished buildings, such as Espace Seine in Levallois-Perret (SNCF/Geodis), Boma in Suresnes (Fromageries Bel), and, more recently, the Tour Europe in La Défense (Dalkia), illustrate the advantages of properties that provide companies with moderate rents, convenient accessibility, and, in some cases, energy efficiency.

Moreover, large tenants usually prefer properties and tertiary sectors that have been significantly discounted. Nonetheless, despite their interest in reducing property costs, large tenants do not usually wish to relocate far from their present site. With a few exceptions (e.g., Sonovision in Aristide in Bagneux), companies prefer new or redeveloped large properties in nearby sectors that allow them to optimize their properties without moving too far (Mutuelle Générale in Pushed Slab in Paris 13th). Other occupiers compensate for greater distance by leasing large refurbished headquarters in which they can regroup their teams at the lowest possible cost while retaining a desirable address (Groupe Henner in Neuilly-sur-Seine).

The WDB and La Défense underpin activity in the inner suburbs

Unsurprisingly, the areas that continue to outperform are those well supplied with new or refurbished large properties that are conveniently located and affordable. Such is the case in the western business district (WBD), where take-up has risen by 46% over the past year. Of the 254,637 m² let since the beginning of the year, 55% was for office space greater than 4,000 m², with 38% in the town of Levallois-Perret alone. Other towns have done well and contributed to the WBD’s performance in 2014, expected to be its best since 2008. Rueil-Malmaison owes its success to high-quality new development projects (American Express Voyages, after Ingerop, in Green Office) and to the gradual absorption of large and medium-sized refurbished office properties (e.g., Soletanche Freyssinet in Eko, Alexion Pharma in Atria).

After a busy second quarter, lettings activity stalled in La Défense this summer, with few large deals such as Dalkia’s letting of 8,334 m² in the Tour Europe. However, with 126,531 m² let in La Défense since the beginning of the year, take-up has already risen by 31%, compared with all of 2013. Furthermore, negotiations under way suggest that new large leases will be signed before the end of 2014, thereby speeding the absorption of new, refurbished, and secondhand large properties in La Défense and, in some cases, reaffirming the district’s appeal to companies in other geographic areas.

Other markets in the inner suburbs were quiet in the third quarter, affected by competition from nearby (more or less) tertiary sectors and by their lack of properties offering value for money. For example, no transaction greater than 4,000 m² has been seen in the southwestern suburbs since the end of the first quarter, when one of the year's biggest deals (Solocal in Citylights in Boulogne-Billancourt) was finalized. Except for the northern suburbs, whose misleading performances are attributable almost exclusively to the 45,000 m² of Veolia Environnement’s new headquarters in Aubervilliers, weakening demand is much more tangible in the emerging districts of Île-de-France. The Boucle de Seine and the eastern suburbs have not recorded a single transaction of more than 4,000 m² since the beginning of 2014.

Paris: a market boosted by new and redeveloped supply

Since the beginning of the year, 533,899 m² have been let in inner Paris, an increase of 33% year on year. In recent months, occupiers have shown enthusiasm for high-quality large properties in Paris. The 20 transactions greater than 4,000 m² signed since the beginning of 2014 (including six in the third quarter) totaled 194,075 m², 20% more than in all of 2013. Of those 20 transactions, 12 were for new and redeveloped buildings, while the others were mainly for lettings of refurbished buildings.

With 313,438 m² (+27% year on year), the CBD has accounted for 59% of total take-up in inner Paris since January. After enjoying a very lively first half, this market was more subdued in the third quarter, notwithstanding the finalization of three new transactions of more than 4,000 m², including Fast Retailing Group in Louvre Saint-Honoré and Public Système at 23−27 rue Notre-Dame-des-Victoires. This relative slowdown and the completion of major projects outside the CBD account for the slight rebalancing of the Paris market. After the letting in the second quarter of Garance (Paris 20th) in Paris Centre Est by the Ministry of the Interior, two transactions of more than 10,000 m² were completed in the third quarter in neighborhoods adjacent to Paris Rive Gauche: the letting by Mutuelle Générale of 13,172 m² in Pushed Slab, a recently completed building in the ZAC (i.e., designated development area) Rungis (Paris 13th), and the development project for the new headquarters of SMABTP, not far from the Porte de Versailles (Paris 15th).

The Paris market is expected to reinforce its dominant position in the months ahead. Although large tenants have opted to renegotiate their leases, several large-scale transactions are expected in the CBD. Despite their limited supply, the Paris Centre Est and Paris Rive Gauche sectors will nonetheless benefit from the development of numerous projects for new and redeveloped buildings. This growth reflects the progress of refurbishment operations in certain districts outside the city center that offer easy access to public transport into Paris (extension of the ZAC Rive Gauche, ZAC Bédier, ZAC Paris Nord Est, etc.).

Status quo for supply

At 4,259,788 m², available supply within six months in Île-de-France has risen slightly year on year (+1%) but fallen by 4% since the end of the first half. With a vacancy rate of 8%, opportunities remain relatively plentiful. The downturn in occupier demand in the third quarter explains the lack of any significant change in supply. This stability is also due to the relatively limited supply placed recently on the market. The 9,500 m² at 24−30 rue Drouot (Paris 9th) make up one of the most significant offers and explain the 5% quarterly rise in new and redeveloped available supply in the CBD. On the other hand, available supply of new and redeveloped buildings has leveled out in La Défense and declined significantly in Paris outside the CBD (−16%) and to a lesser degree in established areas in the Hauts-de-Seine (−4% in the WBD, −2% in the southwestern suburbs).

New and redeveloped properties now account for 25% of available supply in Île-de-France, though their market share is considerably lower in Paris (12% inside the CBD and 16% in Paris non-CBD). This scarcity, in addition to vibrant letting activity in Paris, has provided the impetus for the launch of numerous speculative projects. Several such projects have already been let: Garance (Paris 20th, let to the Ministry of the Interior), Laffitte-Lafayette (Paris 9th, let to DLA Piper), and, more recently, 23−27 rue Notre-Dame-des-Victoires (Paris 2nd, let to Public Système). Outside Paris, project launches remain rare, and those that succeed often come with pre-leasing terms and conditions for all or part of the operation (e.g., Résonance in Bagneux). Challenging market conditions and intense competition for supply and tertiary sectors in the inner suburbs are making investors cautious. This risk aversion slows the new construction projects and explains the slight decline in the number of square meters under construction in Île-de-France (1.9 million at the end of the third quarter). This trend is not likely to reverse in the coming months and may even deplete high-quality supply in the short and medium term in the inner suburbs that are highly sought-after by large tenants.

 

 
OUTLOOK

The final months of the year are usually favorable for the completion of large deals. The Île-de-France office market is likely to regain a certain degree of robustness in the fourth quarter, although it will be difficult in 2014 to reach the average of the past ten years (2,179,962 m²). Furthermore, nothing suggests that the flurry of activity at the end of 2014 will spill over into 2015. The inner-Paris market will certainly remain dynamic, but business activity will generally be mixed, hurt once again by sluggish economic growth and an unfavorable political and regulatory environment. As for the French property-investment market, it is expected to end the year on a positive note, with estimated volume of €20 billion for 2014—the third-best year of the decade, after 2006 and 2007. “In 2015, the property-investment market should remain lively, although the high-quality supply placed on the market—still limited, despite property sales by investors rebalancing their portfolios or taking profits—will not be adequate to meet very strong investor demand," concluded Olivier Gérard.