The property investment market in France rebounded in Q2 2012 recording investments totalling approximately €3.8bn versus €1.8bn in Q1, according to research from Paris-based manager La Francaise Asset Management.
However, the firm said the market is moving at two different speeds, and activity has mainly focused on large transactions by international investors. For the first time since 2007, foreigners accounted for more than 50% of investment flows.
Domestic investors (insurance companies, pension funds and SCPIs) preferred medium-size assets in Ile-de-France and elsewhere. After a long period of inactivity, these players are expected to boost activity in H2.
The market is being constrained by a lack of quality stock, which has kept prime yield rates under 5%. However, yield rates are rising alongside rental and technical risk: some transactions were conducted in Ile-de-France at 6.5-7%, the firm said.
In Q2 2012, the residential market entered a downward phase, which has resulted in falling volumes rather than falling prices. After peaking in January due to a reduction in the deduction on capital gains, sales dropped sharply (-20% year-on-year). A contraction in the number of home loans granted (-30% year-on-year in August 2012) was also a key factor.
Overall, France’s slowing economy plus the less attractive tax and regulatory environment have slowed real estate projects. Property values dipped again in Q2, continuing the trend from the end of 2011, according to official statistics.
However La Francaise Asset Management believes unfulfilled demand for housing, which remains high and shows no sign of abating, will support prices from this level.
Against a backdrop of both recession and uncertainty, French corporate real estate continues to offer performance other asset classes would have serious trouble matching, the manager said.
The overall performance of the IPD France index in 2011 was 8.4%, while over the same period the CAC 40 was around -13%, and that of French sovereign debt below 5%. In 2012 and 2013, real estate will continue to offer stable rental yields while property values hold firm.
While some sectors are still shielded from the wider economic climate, others are expected to suffer from the effects of the downturn. Given this, it will be necessary to re-focus the investment strategy, the manager noted.
The time required to conduct appraisals and transactions is acting as a buffer against volatility in the capital markets. The fixed duration of leases also offsets the impact of a recession, which explains why some managers have low levels of arrears. Market rents and index-linked rents do not mimic economic fluctuation or price inflation, but lag the macro-economy, offering a resiliency of sorts.
Longer term, the outlook for corporate real estate is related to job creation, which has now stalled in France. “Businesses rely on household consumption, which is muted; hotels need tourist activity, which is volatile; housing is reliant on household income, which is stagnating,” the report noted.
In addition, real estate is vulnerable to increased tax pressure on property holders, so the deterioration of the wider economic environment will impact the real estate sector in coming months.
La Francaise Asset Management said certain sectors – such as environmentally efficient buildings – are still witnessing demand, as they replace obsolete structures. Hotels, supported by an upturn of foreign clientele, are also proving resilient, as is demand for data centres and healthcare facilities.