Investment holds out a silver lining

We do not want to talk the market down, chorus agents in Paris. And certainly optimism is always a good thing. But the fact is that Paris and the French market have, like their European neighbours, had a tough 2002. And 2003 does not look as if it is going to get any better. GDP is still falling and unemployment is rising. The office and retail sectors are slowing down or at a standstill. One bit of good news is investment. However, focusing on the global outlook, the threat of war with Iraq is playing havocwith the market. According to Catella’s Property Market Trends 2003: “As equity prices plunged and geopolitical tensions rose to the fore – notably the threat of war on Iraq – the prevailing optimism surrounding short-term prospects was steadily eroded.” Catella’s report goes on to say that last year markets underachieved. “As we begin 2003, business confidence remains uncertain, particularly in Europe and Japan,” it adds. And the report acknowledges that global recovery hinges on the world’s largest economy – the US. “In this regard it is encouraging that consumer demand is resilient despite rising unemployment,” it says. “US GDP growth recovered in 2002, accelerating from 0.3% in 2001 to an estimated 2.4%, and forecasters are confident recovery will continue.” But the report points to several remaining risks, such as the larger correction in the US dollar and weak consumer and business investment, especially in Germany. While the French economy is not in as bad a shape as neighbouring Germany’s, it has experienced a downturn. GDP growth averaged 3.2% in 1998-2000, but slowed to 1.8% in 2001 and 1% in 2002. EU surveys do indicate signs of improvement, though. Investment market The report points out: “The French economy is expected to grow more strongly than the EU average, and job creation in Ile de France is forecast to increase this year and next.” It goes on to state that in the French investment market, which remains the second-most attractive European investment location after the UK, real estate investments in 2002 are estimated to have exceeded €10bn, with German funds especially active. There is one thing to warm French agents’ hearts, if not Anglo-French relations, and that is the perception among French agents that no matter how bad their market may be, it is not as bad as England’s. As one unnamed agent puts it: “When the head of our agency comes back from London, he is always glad to see that we are doing better!” Offices Demand for 2003 is predicted to be thesame as last year’s. The market in thefirst and second rings of towns aroundParis could benefit tenants looking tosave money. Around 250,000 sq ft ofnew supply is due to hit the Paris marketin 2003 in Quartiers d’Affaires andLa D,fense. If rents are stable when these new buildings arrive on the market, thosefor older buildings will decline. Thierry Juteau, Cushman & Wakefield Healey & Baker Figures for take-up in Paris over the past two years suggest the market has slumped. Annual take up for 2002 was 1.5m m2, only slightly down on the previous year. But when compared with the figure for 2000, when take-up was almost 2.5m m2, last year’s looks terrible. However, that is not the case, as many Parisian agents are keen to stress. Take-up in 2000 was a record that had been slowly building since 1998. Today, the numbers are at a more realistic level. Type of building “If you look at the past 10 years, we are now at an average level,” says Michael Morris at Jones Lang LaSalle. What has changed this year is the difference in the type of building being let. As Catella’s report, Property Market Trends 2003, highlights: “In contrast to 2001, office lettings last year in the segment above 5,000m2 grew and accounted for between35-40% of total annual take-up. “On the other hand,” continues the report, “office lettings of small andmedium-sized units decreased strongly last year, mainly as a result of much weaker demand from the hi-tech sector. Nevertheless, lettings of very large units – those of more than 20,000m2 – increased strongly last year.” Unfortunately, however, the increasein lettings of larger units was mainly the result of companies consolidating in an effort to cut costs. Cost-cutting has also led to companies, both in the public and private sectors, decentralising to cheaper regions. The bulk of lettings of large space occurred mainly in the emerging sub-market in towns north-west of Paris, such as Clichy, Saint Ouen and Saint Denis. The property will not be filled easily. As Morris says: “The space these companies are freeing up will need major refurbishment.” This empty property is coming on to the market at a bad time. Vacant space in greater Paris reached 2.8m m2 at the end of 2002. “We can say that the letting market is slowing down, but we are still optimistic,” says Knight Frank’s Julien Bonnefoy. Like other markets, Paris has suffered from the effects of the economic slowdown. Owing to the cautious approach of developers and banks, however, there is no risk of oversupply. “Unlike the 1980s, developers aren’t taking risks of not knowing who their tenants will be,” says Philippe Perello of Knight Frank. Perello, like his counterparts, predicts the market will become stable and possibly start growing in 2004/5. Retail 2002 saw a slowdown in the volume of transactions, with demand dropping for units of less than 500m2. Development authorisations from the Commission D,partementale d’Equipement Commercial are increasingly difficult to obtain. Despite this, however, around 40,000m2 of schemes are under way, in particular in the 8th arrondissement. Two trends are emerging with shopping centres. Big cities are seeing the development of leisure/retail centres, while smaller cities and towns are getting shopping galleries anchored by “cultural” entities, such as the FNAC type of outlet. In addition, railway stations and airports are offering new sources of development. Last year saw also the setting up of the Federation of Out of Town Retail Property. Christian Dubois, Cushman & Wakefield Healey & Baker A bugbear familiar to UK agents and developers – the slowness of gaining planning permission for building or refurbishments for retail use – is of particular concern to Christian Dubois of Cushman & Wakefield Healey & Baker. He says the length and complexity of the process, which has been getting slower over the past few years, could drive potential occupiers away. Dubois says the problem lies with the numerous non-public Commission D,partementale d’Equipement Commercials. These bodies issue licences for developments of more than 300m2. At worse, the process can go through several commissions and take as long as two years. By then, says Dubois, a prospective tenant could have pulled out. “This is not something where there’s a signing of leases,” says Dubois. “So you can loose them. We must anticipate what we will be doing in two to three years. “If the retailer wants to trade above a certain level you know you won’t be able to open your boutique for a few years.” Dubois says that, even if the companies that embark on the process are financially secure, they may not stay the course. “The process took so long that Gap withdrew from two Paris projects. H&M has withdrawn from one,” says Dubois. Even though the CDEC in Paris has turned down up to 10 licences, Dubois admits that he cannot specifically say the process is slowing the market. “But it does not help,” he adds. While major requirements for more than 1,000m2 are declining, there is still activity in the 150m2 to 250m2 range, with the likes of Mango and Zara driving the market. Out-of-town retail parks are also doing well, with more developers taking an interest in schemes between 6,000m2 and 20,000m2. The traditional French out-of-town retail parks are the equivalent of stand-alone retail units. The new breed, however, such as la Croix Blanche, south of Paris, developed by French developer SD2I, is similar to ones in the UK. Of these latter parks, Dubois says: “You have trees, parking and nice architecture. The CEDCs are more in favour of these developments. The quality of buildings is improving.” Standard of buildings The setting up last November of the Federation of Out of Town Retail Property, which includes groups such as developer Aparc, will help to ensure the quality of buildings is maintained. The group, which is aiming to formalise a link with the UK’s National Council of Shopping Centres, has signed a charter agreeing tree density and building standards. Dubois says the FOTRP, which CWHB initiated, is aiming to be a single point of contact for the whole profession. And that in using this united front, it will be in touch with local authorities. Industrial Industrial groups were last year more active than the logistics sector. The demand from logistics companies has been more important than in 2001, but it has come from unexpected quarters, such as a renewed demand for old buildings, often requiring substantial changes. There has been a significant increase in supply, with a stock of around 825,000m2, of which about 50% are non-speculative operations. Bruno Montigny, Cushman & Wakefield Healey & Baker Hurrah. There is good news for the industrial sector as it bucks the trend of the office and retail markets. There is still increasing demand for warehousing around Paris, London and Madrid. King Sturge’s European Industrial Property Markets Report 2002 says: “Four out of 10 of all new jobs created between 2000 and 2006 in western Europe will be around these three principal European capitals.” In the Paris market, the logistics sector remains competitive relative to its European neighbours, with lower rental levels attracting occupiers and higher yields drawing investors. Prime rental values are stable at between €55 and €58 per m2 pa. The Ile de France region still holds a strategic position at the heart of the European market, but the area has not been spared from the economic slowdown. This has sparked a trend, now slowing, towards outsourcing logistics operations. Even so, there is still strong development potential in the warehouse property market. According to King Sturge: “With the increase in distributors as users, demand remains strong for modern premises, because a significant amount of existing industrial stock is obsolete, requiring renovation to meet new standards of security and modern fiout requirements.” Investment At €11.2bn, the investment market has remained active, despite being 9% down on 2001. But if the big property portfolios put on the market by companies such as Thaläs, France T,l,com and the Post Office in 2002 are taken out of the equation, then last year was actually a better year than 2001. The Germans have been the most active this year. Nicolas Verdillon, Cushman & Wakefield Healey & Baker High costs in the UK have made the French investment market the number one target for German investors. They were the biggest investors into France last year, accounting for 31% of the market. French investors took 27%, US investors 24% and UK investors just 4%. A recent example of German investors in action comes from FPDSavills, which in January advised DBRE Spazialfond to invest in the 2,330m2 24 rue Chauchat 75009, Paris, from Generali. “This transaction demonstrates the way property, located in the traditional business districts in Paris, continues to attract interest from investors when it is both fully let and refurbished,” says FPDSavills’ Patrick Jenvrin. But while the Germans are keen to continue investing, they will not put their euros into any old property. Even though this year will see an estimated 250,000m2 of new space arrive on the Paris market, Germans investors will only be looking at grade A space in prime locations. “German investors like investing in new buildings rather than secondhand stock,” says Philippe Perello of Knight Frank. “They prefer buildings that are fully let, with good technical specification, and large tenants. The secondhand market is more attractive to opportunistic funds like the US’s.” The obvious problem is, as Perello points out, the strong competition for new stock. He is, however, pleased to say that, so far, the investor market has not been affected by the lettings market. “In terms of volume, it’s reached €10bn in France.” Investors are attracted to France because it is a major market with high-quality buildings in good areas and attractive yields. Nicolas Verdillon of Cushman & Wakefield Healey & Baker says: “When you compare the yields you can reach on the German market – which are 4-5% in Frankfurt – with 6-7% in Paris’s central business district, this market is better.” As for 2003, Verdillon says “We can expect this year that German funds will consolidate and adjust some of their funds, but they are going to be very much present.” Retail market indicators French consumers have above-EU-average spending power, as shown by the 2.8% growth in 2001 France EU average GDP per capita 2001 (€ pa) 24,436 20,971 Consumer spending per capita 2001 (€ pa) 13,438 12,200 Consumer spending growth 2001 (%) 2.8 2.1 Consumer price growth 2001 (%) 1.6 2.5 Number of foreign retailers in market 431 262 Number of forecast market entrants 2002-7 135 96 Source: Cushman & Wakefield Healey & Baker Key investment transactions Property Submarket Seller Buyer Date Price (€m) Yield (%) Comments Siege de Lafarge, 61 rue des Belles Feuilles: rue Merimee, Paris Paris CBD Lafarge Westinvest Q4 ’02 112 6.5 Office Place d’Arvieux, Espace Gaymard (euromediterrannee), Marseille Region Eiffage DIFA Q3 ’02 20 Spec Office Grand Angle, Euralille, Secteur du Romarin, Lille Region Elige/Marignan Bail Investissement Q3 ’02 14 8.0 Office Avenue de France (M3G), Paris Secondary business districts Bouygues Immobilier DGI Q3 ’02 160 Spec Office Rue de la Victoire, Le Vinci, Paris Paris CBD CGU DIFA Q2 ’02 244 6.5 Office Le France, 115-123 ave Charles de Gaulle, Neuilly West CBD Unibail Westinvest Q2 ’02 130 6.5 Office Le Carillon, Nanterre, La D,fense West CBD Azur GMF Carlyle Group Q2 ’02 66 Spec Office 14-16 Capucines: 5-7 Bis rue Volney, Paris Paris CBD Credit Fonciere Gecina Q2 ’02 64 Spec Office CC Chelles 2, Chelles Outer suburbs EMA Unibail Q2 ’02 56 7.7 Shopping centre 7 Place d’lena, Paris Paris CBD Whitehall CGI Q1 ’02 140 6.0 Office Source: MBE Conseil and Catella Property Consultants SAS “The principal purchasers of offices remain the German funds, still hungry for French properties and targeting modern buildings,” says Charles Tatham of FPDSavills. “While some players were prepared last year to create investments by funding speculative schemes, the leasing market will not encourage such initiatives this year. Yields will come under pressure in 2003 because of economic uncertainty, but the weight of money ensures keen competition and underpins prices.”