Buyers return to French real estate market
The commercial real estate investment market in France, stalled since the beginning of the year, has been marked by a mass influx of foreign investors, according to analysis in a quarterly newsletter from Paris-based La Française Asset Management.
The trend reflects the intrinsic high quality of real estate as an asset class amidst the prevailing climate of risk aversion, the firm said.
After the wave and subsequent retreat of foreign capital in the previous cycle, French investors, whether institutional, private or consumer, returned to investing in the domestic market in 2009.
Over the past three years, their share of real estate investment has topped 60% of invested volume, driven by heavy inflows from REITs, insurers and pension funds. Non-domestic investors had also been expected to head for France, considered, with Germany and the UK, as one of the three safest markets in Europe. But that interest did not materialise.
However, since the third quarter of 2011 a “tidal wave “of non-domestic capital has been pouring in, driven by Scandinavian, Asian and American newcomers and by old hands in the French market from the Middle East, Singapore and Canada, according to la Française Asset Management.
The percentage of foreign investment is now likely to be higher than 50%, as investors believe that office space, retail stores and luxury hotels will continue to outperform the depressed domestic economy
Commercial real estate is seen as a long-term hedge against inflation and for risk-averse long term investors, diversification and stable cash flows are more important than the point of entry into the cycle.
Major foreign institutional players are now making asset selections in which rental security and the high technical quality of the buildings play an important role but where investment quality overrides all other criteria, the firm said.
They tend to prefer large assets, rarer on the rental market and less exposed to competition from other investors. Unlike the previous cycle, these newcomers prefer tailor-made solutions that can lead to a partnership or joint venture
with a local long-standing player who has the ability to source assets and provide rental management and technical building services.
This engagement is preferred to costly local offices and discretionary funds, which are unsuited for custom-tailored strategies. It is also a tool for aligning interests and lowering risks when entering an unfamiliar market.
In a complex economic climate the office space market in the Paris region slowed in Q1 2012. Major transactions were rare as business and government adopted a wait-and-see attitude. In regional capitals, business is dependent on the fabric of the local economy. The market in Nantes and in Lyon is dynamic while in Lille and Marseilles, cities more dependent on consumer demand, the market has stalled.
Activity is also muted on the investment market, with only €1.8bn invested in Q1 2012 compared to €6.6bn in Q4 2011. The market is feeling the effect of risk aversion – “completely justified in this economy” – difficulty in obtaining loans and political uncertainly, the firm said.