A total sum of €15.1 billion was invested in the French commercial property market in 2013, slightly up on 2012 and fairly close to the average figure of the last 10 years. Whilst demand for the most emblematic properties remained strong and despite the lack of supply, this good performance can also be put down to the renewed interest in slightly higher risk assets, confirming the attractiveness of the French market for a wide variety of investors.
Lettings market performances were more contrasting and were penalised by the weak economy and certain fiscal and regulatory measures. Following on from the decline observed in 2012, the total number of square metres let or sold to occupiers in Ile-de-Francein 2013 went down by a further 17% compared with the previous year. On the other hand, the large warehouse market performed much better with a 21% increase in take-up over the course of a year. This recovery should, however, be put into perspective as both the Paris and Lyon markets recorded a significant fall in activity. As far as the retail market was concerned, 2013 was a year which blew both hot and cold. Secondary sites, more exposed to changes in consumer spending habits and competition from e-commerce, faced difficulties, whilst the top retail spots in large towns remained highly sought after by international brands. Retailers from overseas continued to expand in an opportunistic manner with some opting out of their less profitable stores.
THE FRENCH INVESTMENT MARKET
A total of €15.1 billion was invested in the French commercial property market in 2013, slightly up on 2012. The market benefitted from more a varied range of supply, as certain owners sought to refocus their property holdings on one or two main asset types or free-up liquidity, by selling off assets. This helped attract interest from a growing number of investor profiles. Whilst demand from institutional investors for the most emblematic properties remained strong, there was also a renewal in demand from certain opportunistic investors for less securely-let assets.
- Slight rebalancing of the market: large transactions helped compensate for the fall in the total number of transactions (393 in 2013 vs 421 in 2012 and 451 in 2011). Indeed, 36 large transactions over €100 million accounted for 48 % of total investments in France in 2013. However, the breakdown of investments shows that the €50-100 million category was the most active, making up for 52 transactions (vs 39 in 2012) and €3.7 billion (vs €2.7 billion in 2012).
- Ile-de-France, driver of the market: with €11.1 billion invested in 2013 (€11 billion in 2012), Ile-de-France was home to 74% of the property investments to have been made in France in 2013 and to 27 out of the 36 transactions over €100 million. Offices accounted for 78% of investments in Ile-de-France in 2013 (vs 81% in 2012). Retail property investments in Ile-de-France also remained fairly stable compared with the previous year (17 % in 2013 vs 15 % in 2012) thanks to the completion of several large-scale acquisitions of emblematic, mixed-use properties (e.g. 65-67 Champs-Elysées and 8 Place Vendôme), shopping centres (e.g. Passy Plaza) and portfolios with a large share of properties in Ile-de-France(e.g. Altaprime portfolio).
- Stability of investments in the provinces: property investments made in the provinces in 2013 remained fairly stable at €4 billion compared with €3.9 billion in 2012, but were up by 18% on the 10 year average. Retail investments remained the driver of activity in the provinces. Thanks to the sale of retail arcades and large shopping centres, the retail share was up slightly, accounting for 51% of investments in 2013 compared with 49% in 2012, with the office share going down slightly from 28% in 2012 to 26% in 2013. There were, however, notable differences between regions. The Rhône-Alpes region was the leading region in 2013, accounting for a quarter of all investments to have taken place outside Ile-de-France or €970 million. This was mainly due to several large investments in new office properties and in retail and industrial schemes.
- Contrasting performances in office investments: A total of €9.7 billion was invested in offices in France in 2013, down by 15 % on the average of the last 10 years but close to levels recorded in 2012. Linked to a lack of prime opportunities in the capital, the sharp 39% fall in office investments in central Paris was compensated for by an increase in activity in the inner suburbs. Accounting for €880 million of investments, La Défense saw its best performance since the beginning of the crisis, thanks to two acquisitions of over €200 million each (Tour Adria and Tour Pacific). In particular, volumes went up considerably in the southern suburbs (due to Predica’s acquisition of Eco-Capus in Chatillon) and in the Northern suburbs where 8 transactions over €50 million were recorded in 2013 (not one such transaction took place in 2012).
- Dynamism of retail and industrial space: accounting for €4 billion, retail investments in France were up by a further 10% on 2012, a year which had already performed well. At its highest level since 2007, retail property represented 26% of all investments in France compared with a yearly average of 17% between 2003 and 2012. The retail market benefitted from an influx of quality opportunities on the market and the increase in large transactions. 12 retail investments of over €100 took place, namely retail arcades and shopping centres. Furthermore, accounting for €1.5 billion of investments, the industrial market was up by 15% on 2012 and represented 10% of all investments in France in 2013.
- Driving force of equity-rich investors: accounting for almost one quarter of investments in 2013, retirement funds and French and international insurance companies were particularly active in terms of large investments. They were responsible for 11 deals over €100million, which mainly comprised large office complexes (e.g. Predica’s acquisition of Eco-Campus) and large retail portfolios (e.g. CNP’s acquisition of 7 retail parks and arcades from Immochan). Accounting for 8% of investments in 2013, sovereign wealth funds played a less important role than they did the previous year, although this should not be seen as a lack of interest on their part for the French market. The fall can be explained by the limited number of acquisitions to have been carried out by Middle-Eastern investors. Other players stood out in 2013, like Norwegians NBIM in the industrial sector (joint-venture with Prologis) or Sofaz (acquisition of 8 Vendôme), whilst other newcomers are set to make an appearance in the first few months of 2014.
- Renewed interest from opportunistic players: 2013 saw renewed interest from opportunistic investors and notably Anglo-Saxon investment funds. They particularly helped drive certain geographical sectors which have been fairly inactive since the beginning of the crisis, as can be demonstrated by the acquisition of office properties in the inner suburbs (such as the CACIB headquarters in Courbevoie and River Plaza in Asnières) or industrial premises in Ile-de-France and the provinces (Logicad and Quartz portfolios).
Whilst fiscal uncertainty remains and the declining performance of the lettings markets is likely to weigh on investments, there should be an increase in volumes invested in commercial property in France in 2014. Several large or very large transactions are already underway, demonstrating the high level of equity available for investments and the continued demand from long-term institutional investors (insurance companies and sovereign wealth funds) for core assets. Furthermore, vendors making more concessions and renewed interest from opportunistic players will work in favour of higher risk properties, confirming the attractiveness of the French market for an ever wider range of investors.
THE ILE-DE-FRANCE OFFICE LETTINGS MARKET
The uncertainties surrounding the economy have slowed down occupier decision-making processes and have incited many occupiers to renegotiate the terms of their current lease rather than move premises. This trend weighed heavily on take-up in 2013, which was down by 17% on 2012 or by 25% on 2011.
Lettings transactions over 4,000 sq.m., which had driven the market in the past, were particularly few and far between. The fall in large transactions contributed to a sharp increase in available stock, which comprises both new or redeveloped office complexes and second-hand premises which do not correspond to current occupier requirements for more efficient and modern premises.
- Large transactions no longer drive the market : A total sum of 1,743,102 sq.m. of office space was let or sold to occupiers in 2013, representing a 20 % fall compared to the average of the last 10 years (2,179,885 sq.m.). Whilst the total number of lettings continued to fall (2,033 compared with 2,271 in 2012 and 2,586 in 2011), this sharp decline was also linked to the fall in large lettings transactions. Only 66 lettings over 4,000 sq.m. were recorded in 2013 compared with an average of 90 for each year between 2003 and 2012. The fall in the total number of square metres let in properties over 4,000 sq.m. is therefore also significant, down to 717,592 sq.m in 2013 from 1,044,379 sq.m. in 2012 (- 31 %). Large transactions now only account for 41 % of take-up compared to 50 % in 2012.
- New and redeveloped properties remain the most sought-after: take-up of new and redeveloped properties over 4,000 sq.m. went up from 67% in 2012 to stand at 73% in 2013. This can be put down to the lettings of large office premises which had been on the market for several months (e.g. SAP in So Ouest in Levallois-Perret and Orange in Eastview in Bagnolet) and the success of new districts under development such as ZAC Paris Nord-Est in Paris (Paris Board of Education in Le Visalto) and Le Trapèze in Boulogne-Billancourt (Boursorama in You, BBDO in Ardeko, PSG in La Factory).
- Continued decline of the Paris market: In 2013, take-up of office space in central Paris was down by 11% on 2012 and fell way below the average figure of the last 10 years (- 22 %). Indeed, the total number of lettings of space over 4 000 sq.m. has fallen to its lowest level since 2000, confirming the difficulties faced by small-medium sized companies and the fact that many large occupiers are tending to renegotiate the terms of their lease rather than move premises. This trend can also be explained by the lack of new and redeveloped supply available, which was notably the case in the Paris Rive Gauche district of Paris where take-up fell by 40%.
- Contrasting performances in the inner suburbs: the south-western suburbs were the only sub-sector in the inner suburbs to have recorded an increase in take-up over the course of a year (+23%). Large occupiers in the sector benefitted from the influx of new and renovated office space available to let in order to upgrade to more modern premises. Other markets remained fairly inactive, which was certainly the case for La Défense. The business district recorded take-up of just 96,509 sq.m in 2013, which was its poorest performance of the last decade. This was due to the fact that there were only 4 transactions over 4,000 sq.m. and only one of these was over 20,000 sq.m. Lastly, second-choice markets did not seem to play as significant role as they had done in the last few years, despite the fact that the weak economy still favours the implementation of cost-cutting strategies. For example, take-up fell by 48% in the northern suburbs. However, this fall should be put into context: 2011 and 2012 were particularly successful and some significant lettings transactions continued to take place in 2013, such as Saint-Denis (la HAS in Green Corner), Saint-Ouen (SCA Hygiene Products in Eurosquare 1) and other towns in Seine-Saint-Denis (DHL in Le Mermoz in Bourget).
- Record level of available stock: Representing a total of 4,367,965 sq.m at the end of 2013 (+ 13 % on 2012 and + 17 % on 2011), the amount of supply available within a 6 month period reached its highest ever level. The extent to the increase however greatly depended on the sub-sector. For example, the increase which much less marked in the capital (+ 9 % between the 1st and 4th quarters of 2013), where the continued vacating of second-hand premises was in part compensated for by the limited number of new office properties on the market. Some business districts in the inner suburbs on the other hand saw their stock increase significantly. This was notably the case in La Defense, where the 6 month vacancy level of 14.1% was at its highest level in history. This can be explained by the continued vacating of second-hand properties, the slow-down in the speed at which premises are let out and the recent delivery of several large new and redeveloped office complexes.
- Negotiations going in favour of occupiers: Prime rent in Ile-de-France stood at 753 €/sq.m./yr at the end of 2013, down by 10 % on the previous year, which can partly be explained by the very limited number of lettings of prime Parisian properties. The forthcoming marketing of properties in the 8th district of Paris near Etoile (including 1 Euler and 3-5 Friedland), where supply is usually very low, should help bring prime rents back up to the levels seen in the past few years. However, prime properties are far from being representative of the general trends observed in Ile-de-France, where landlords have been obliged to grant more and more incentive measures to future tenants and where there is often a considerable difference between headline rents and net economic rents.
The sluggish recovery of the economy will not allow for any significant improvements in take-up in 2014. Take-up is likely to remain under the 10-year average, due to the tendency of companies to renegotiate their current lease terms rather than move premises.
Supply in Ile-de-France will subsequently remain high and will enhance competition between the different sub-sectors to attract occupier demand. The increasing number of availabilities may help kick start activity in the suburbs as lease terms will continue to be relaxed and in Paris as more well-placed redevelopment schemes will continue to be launched. With less marked extremes between available supply and occupier requirements, this trend is expected to reinforce demand for the highest quality and most energy efficient properties offering the best services and reasonable rents.
THE LOGISTICS PROPERTY MARKET IN FRANCE
The French logistics-warehouses market recovered in 2013. Total take-up increased by 21% year on year, to 2.17 million sq. m. This performance should nonetheless be put in perspective. Volumes were inflated by large turnkey projects of in-house logisticians in the retail-distribution sector and activity in Ile-de-France was still well below the average of the past ten years.
- Dynanism of In-house Logisticians: As in 2012, in-house logisticians in the retail-distribution sector were the major drivers in the French market and accounted for 70% of total take-up volume in 2013, reaffirming the broad scale of cost-cutting strategies implemented in recent years. Most real-estate projects fill a heightened need for profitability, in an environment of slower consumer spending and a price war among retailers. Sales channels have also proliferated with the rapid development of e-commerce and click-and-collect grocery pickup. These trends explain the growth of increasingly sophisticated buildings equipped with an abundance of information systems and automated features.
- Stagnation of Paris and Lyon Markets: In 2013 in the Paris conurbation, 440 000 sq. m. were let or sold to occupiers, a decline of 21% year on year and the lowest level recorded since 2004. Contrary to the major trends seen in France, large transactions were relatively rare. The Lyons market also lagged, down by 53% on 2012. The markets in Lille and Marseilles were on the other hand much more active in 2013 than in the previous year benefitting from the launch of certain made-to-measure platforms (Castorama in Saint-Martin-de-Crau, Gifi à Sin-le-Noble, etc.).
- Slight increase in available stock: The rise in take-up was not paralleled by a fall in available space, because lettings were mainly of turnkey rentals and owner-occupier projects, not of available supply. At a little more than 3 million sq. m. throughout France, available supply rose by 5% year on year, mainly because of further vacations. Several occupiers have reduced the number of their sites and turned instead to new or recent large platforms. Available stock is mainly concentrated in Ile de France, especially in the southern suburbs (Sénart) and in the north around Roissy (Marly-la-Ville, Saint-Witz, etc.).
- Large disparity in rental values: Rental values in 2013 were stable overall, with prime rent slightly more than €50/sq.m/year in Île-de-France. However, the overriding need of tenants to lower property costs continued to dictate negotiation (or renegotiation) terms with landlords. Anxious to limit the costs associated with vacancy rates and to keep their assets occupied, landlords grant significant incentives, mainly as rent-free periods. Furthermore, large turnkey schemes have brought values down, with a difference of up to 10% compared with market rents, depending on the sector.
In 2014, the French logistics-warehouses market will be challenged by sluggish economic growth, undefined fiscal policy, and the lack of available land in some of the major hubs (Lyon, Lille, Marseille). However, the business recovery seen in 2013 should continue in 2014 despite the increasing trend of lease renegotiation. In-house logisticians—forced to reduce their transport costs, to prepare for changes in regulatory standards, and to adapt to the abundance of new sales channels—will continue to play a vital role as large, modern retail-distribution platforms are implemented. These platforms will boost take-up in the centers along the north-south axis and in other markets around France in areas that offer real-estate opportunities and locations near major transport lines.
THE RETAIL PROPERTY MARKET IN FRANCE
In 2013, economic problems confronted by a growing number of merchants, combined with retailers’ decisions to continue network cost-cutting by eliminating their worst-performing stores, further divided the French retail-property market. In contrast with the downturn of second-tier thoroughfares and sites, leading assets enjoyed steady demand by retailers aiming to raise their visibility and to reduce the risks related to store openings. In order to expand their network in France or to try out higher-quality formats, retailers took advantage of departures by a few large groups in prime locations where there is usually little available supply.
- A market animated by assignments of stores: Assignments constituted a large part of the French retail market in 2013, presenting growth opportunities for large international retailers (Desigual, Place du Capitole in Toulouse). They also created opportunities for certain established French groups to test new, more upmarket concepts designed to meet new trends in consumption (La Halle in the store formerly occupied by Virgin Megastore). Several recent arrivals in France have continued to expand (Desigual, JD Sports) alongside new international retailers who have just started their expansion (Primark).
- Dynamism of the main streets: Le Marais and Saint-Germain-des-Prés remain two of Paris’s most lively neighborhoods, and continue to attract tourists and wealthy Parisians. Luxury thoroughfares still receive steady demand. New leases (Viktor & Rolf) have reaffirmed the success of the Rue Saint-Honoré. The numerous grand openings on the Avenue Montaigne and Rue du Faubourg Saint-Honoré were, for the most part, projects that had been launched in 2012, transfers and refurbishments of existing stores. Several major luxury openings took place on the Côte d’Azur in Cannes and Saint-Tropez (Valentino). In other parts of France, the chief shopping thoroughfares of large conurbations continued to benefit from the arrival of newcomers and from the expansion of international retailers (Hema in Bordeaux, UGG Australia in Lyons, Desigual in Toulouse).
- Strong increase in prime rents in Paris: Prime rental values in Paris continued to rise because of strong demand from international retailers searching for prime locations on thoroughfares with little supply. This rise was observed in rapidly developing neighborhoods (Le Marais, Saint-Germain-des-Près) and the principal luxury markets. However, the trend was most pronounced on the Champs-Elysées, where Tag Heuer took over the store at n° 104 at a similar, record-breaking rental level to that seen for Mac and Tiffany & Co. The price increases seen in certain Parisian thoroughfares were in contrast to the flat rental values of prime retail locations in the rest of France and in the most established shopping centers and peripheral zones. Meanwhile downward pressure was felt on rental values in secondary locations where negotiations between landlords and tenants became more difficult.
- Rise in shopping centre openings: In 2013, 356,172 sq. m. of new shopping centers were opened, a solid rise of 37% year on year, attributable mainly to the grand opening of a few large-scale projects. Four centers of more than 20,000 sq. m. accounted for half of the volume, including three in Ile-de-France: Ilo in Epinay-sur-Seine, Beaugrenelle in Paris, and Aéroville in Roissy. Beaugrenelle and Aéroville are especially representative of the trend towards very large centers and of the high quality of the available space and architecture. The opening in 2014 of Qwartz in Villeneuve-la-Garenne and Terrasses du Port in Marseilles will confirm this trend. 2013 also saw consolidation of the most-established retail sites via extension and redevelopment schemes (Alma in Rennes, La Toison d’Or in Dijon, etc.) and the modernizing of several local shopping arcades and centres.
- Fall in retail park openings: The volume of retail parks opened in 2013 (455 119 sq. m.) was 18% down on 2012, when several large-scale projects were completed, including Atoll, near Angers. Nevertheless several large projects opened in 2013. Mondevillage (near Caen) and Costières Sud (near Nîmes) are both representative of the rapid growth of the new retail-park formats in the west and south of France. Both recent and scheduled openings continue to highlight the stark differences between new expansion projects for existing parks in Ile-de-France (Clos du Chêne in Montévrain) and the creation of new centers in the dominant retail zones of large conurbations (Waves Grand Sud).
Anemic growth, unwaveringly high unemployment, and economic problems faced by a growing number of retailers will impede the French retail market in 2014. The next few months will be especially challenging for secondary markets, where vacancy rates will continue to rise because of retailer defections and arbitrages. However, the most significant openings will occur in prime retail locations on high streets and in the biggest shopping centers, largely immune to the financial crisis. As a result of their attractiveness and high visitor numbers, these sites will remain sought after, both by new players developing in France and by long-standing retailers testing concepts designed to fulfill the latest trends in consumption and to confront constantly changing competitive forces.
Unlike the growth spurts seen in other developed countries (USA, UK etc.), the French economy remained sluggish in 2013 and is likely to remain so in 2014. “After a difficult 2013, any recovery in the lettings market is likely to be slow. The high unemployment rate, strong fiscal pressures and changes in consumer spending will weigh on occupier real-estate projects. Many tenants will chose to renegotiate their lease rather than move premises. Others will remain prudent as to the choice of a new site, targeting quality and well-located offices, warehouses and retail units which meet all the latest in modernisation requirements” explained Olivier Gérard. The polarization of the French market will therefore continue to be a problem in 2014 and the future of obsolete second-hand premises will remain a key issue. “The investment market on the other hand should continue to perform well as it did in 2013, with renewed interest from a wide variety of investor profiles, beyond the core segment” concludes Olivier Gérard.