Spotting Value
by Benoit Lefebvre
The Best in 2019
Greater Paris logistics total return is expected to be 11.9%
It will be generated by the strongest capital growth in France at 7.4%
Many yields will stay unchanged with the lowest expected in the Paris office submarkets
Paris La Défense offices will lead rental growth at 5.5%, fostered by a historically low vacancy rate
The immense ongoing interest from investors in French assets creates a situation where yields are still declining and ‘spotting value’ is the name of the game in markets across France.
La Défense (9.5%) shows the strongest prime total returns in France for 2019 and also the best on average (3.9% pa) over the 2019-23 forecast period. Prime returns for other Île-de-France submarkets remain low but positive across the period. They perform better in the whole market return measure where we expect Central Paris’s average (5% pa) to exceed La Défense (4.1% pa) over the five-year period.
For the market as whole, returns are better still in France’s regional markets. Lille (11.1 %) will be 2019’s best performing market although its forecast average of 6.0% pa, will be marginally exceeded by Marseille at 6.6% pa over 2019 to 2023.
We expect very low prime capital growth over the forecast period for France; sub 0.3% for Île-de-France and zero or negative in regional markets. Market capital growth, driven by investor interest in non-prime, stays positive in the front of the forecast before fading,
Yield decompression commences towards the end of the forecast period and is of greater magnitude in regional offices (15 to 20 bps) than Parisian submarkets (5 bps). Vacancy rates are at historic lows and already leading to rental increase, although most growth is indirect via reduction in incentives. Average market rents are generating the strongest growth, led by Paris CBD at 1.8% pa over the forecast period.
In comparison, prime rental growth will be low in France, with the most consistent uplifts in La Défense offices at 0.8% pa over 2019-23. We expect the prime rental value in Marseille to fall, because the super prime deal in ‘La Marseillaise’ (a trophy building), which set the previous high, will not be repeated in 2019.
Logistics in France is focused on the North-South Axis hubs, which includes Lille, Îl-de-France, Orleans, Lyon and Marseille. Our forecast looks at Greater Paris where market activity is particularly good. We expect Greater Paris will post prime returns of 11.9% in 2019 and 5.0% pa on average over the five-year forecast.
Greater Paris will see capital growth (7.4%) in 2019 which rapidly falls away across the rest of the period, averaging at only 0.4% pa. Front-loaded capital growth reflects investor interest as 2018 was a record year for acquisition. Yields on prime property are stable at 4.50% over the early part of the forecast and will expand by 10 bps. Logistics rents are forecast to expand by only 0.7% pa on average over the period.
Paris is the key city of France for retail and tourism so naturally receives a lot of overseas expenditure. This gives the city, like London and Milan, a buffer against e-commerce impacts evident in retail in the rest of France. We anticipate Greater Paris will post returns of 6.6% in 2019 (in Europe’s top 5) before turning negative by 2023. Average returns for the sector are projected to be 3.3% pa over the forecast period.
Capital growth will average out at 0.8% pa and yields are likely to stay stable at the front part of the forecast, increasing by 20 bps at its end. Rental growth over the forecast period for Greater Paris, at 2.3% pa, will be stronger on average than both offices and logistics, a reflection of Paris’ international strength.
Risk to the Forecast
As prime real estate yields are mostly impacted by the government bond yield, a strong and unexpected increase in the French OAT will change investor interest in the asset class
A trigger for this could be a greater than expected widening of the spread with German bonds, with worries about proposed increases in government spending to address social concerns. At present, we believe this outcome to be very unlikely