In the latest in a new series putting a spotlight on different real estate markets across the world, Property Week takes a look at Paris’s office sector.
Q&A with James Burke, Associate Director, Regional Investment Advisory team EMEA, Savills:
How has the Paris financial market performed in the last year?
Last year, France boasted €40bn in commercial transaction volumes (Savills) which was a record. This accolade was driven by strong international investment into Parisian offices, with yields compressing, rents rising and take up increasing across several sub-markets in the French capital. The extremely low vacancy rates in some central arrondissements meant there were some areas where there was no free office space and, as such, a competitive tension for prime office space was established.
What has happened to take-up in Paris’s financial office market?
Take up has fallen markedly in the first half of 2020 as a result of the strict national lockdown imposed in France. However the fundamentals of Paris remain compelling and constant – it is an historic city with constrained supply and a diversified tenant base across business sectors with strong domestic corporates.
What are the main challenges facing Paris’s financial office market at the moment?
As with many key European markets there is a dearth of debt in the market at present due to the uncertainty linked to the Covid-19 crisis, with this most acute for foreign investors buying non-core opportunities in secondary locations. Core French buyers who require conservative leverage and have strong relationships with local banks will stand to weather this scarcity best.
What has happened to investment volumes in Paris’s office market?
Investment volumes held up very well in the first quarter of 2020 with figures thought to be slightly higher (at €6bn) than 2019, a testament to how strong the market was. We were expecting 2019’s strong performance to continue into 2020 but Covid-19 has caused the market to pause temporarily and this will impact on the total investment volumes for the year. However, there are tentative signs that the market is reawakening with a number of large lot sizes being brought to the market prior to the summer break.
Over recent years, there has been a marked increase in international investment volumes, particularly from large Asian and European investors. However, throughout this period, the market has been underpinned by well-capitalised domestic investors who will ensure that Paris will retain robust levels of liquidity during the uncertainty. This occurred in 2008/2009 during the GFC when French investors stepped into the breach left by highly levered UK and Irish investors.
What are your expectations for the sector over the next 12 months?
Domestic investors will continue to maintain transaction activity in Paris, with demand particularly robust for core office with defensive rental levels. Greater nervousness will prevail for those buildings leased off historically high rents or in more peripheral sub-markets exposed to a greater level of cyclical volatility.