by Catherine Luithlen, Président Real I.S. France SAS.
The situation on the Paris office market is complex. There is certainly a great deal of capital floating around, and investors are under a pressure to invest, but only a small number of attractive properties are currently making it onto the market. This means that potential buyers need to do their pre-acquisition due diligence very carefully before deciding whether, despite high prices, their target investment offers sufficient long-term (and, more importantly, realisable) value-add potential. As market rents rise, it is still possible to find lucrative investments, providing investors adopt the right property management strategies and do their due diligence carefully. German fund managers have long recognised this fact and are increasingly targeting real estate investments in France – primarily in Paris – as they look to diversify their portfolios. After all, German real estate markets are just as tight, but with an added level of complexity created by Germany's poly-centric federal system, which has created very different framework conditions from state to state. Then there’s the locational strengths of Paris, which is located both in the heart of Europe and within easy reach of London, just two and a half hours away on the high-speed Eurostar train.
A highly dynamic market
The Paris office market is buoyant. The French capital is both the undisputed centre of cultural life and the economic engine of the entire nation. The ninth and tenth arrondissements are currently riding high as major centres for startups in general, and FinTech companies in particular. These young, creative companies are not only disrupting the traditional office market, they are also committed to providing high-quality working environments for their employees – which is why they are primarily interested in Paris’ up-and-coming, future-oriented neighbourhoods. Versatile properties that can satisfy tenants’ ever-more sophisticated requirements are therefore especially attractive for fund managers. With a value add strategy and efficient management, existing properties can be repositioned and subsequently developed into core properties, generating stable cash flows for many years to come.
Many national and international buyers are still pursuing more conservative investment strategies. They have maintained their focus on prime locations, as demonstrated by the recent successful sale of our Parisian office property Avenue Hoche from our Luxembourg-based real estate special AIF, BGV III, to a French real estate fund, which achieved excellent returns for our investors.
France’s politicians have also given the Parisian office market a positive boost. The economy has responded well to Emmanuel Macron's election and the pro-European viewpoints of a majority of the French population. For example, Paris’ CAC 40 stock market rose to an impressive 5,267 points in the aftermath of Macron's election victory. The office market stands to benefit in the medium term as companies confidence increases. In addition, investors are also betting on a potential influx of jobs from London in response to the UK’s imminent Brexit. Companies are starting to make their relocation decisions and Paris is well-positioned, boasting better transport connections to London than, for example, Germany’s financial centre, Frankfurt am Main.
German investors target investments in France’s regional centres
While the investment focus of most French real estate companies is still trained on the French capital, German fund managers have long since identified medium-sized cities with high-speed TGV links to Paris as attractive investment locations. Lyon, Lille and Marseille, for example, are the major economic hubs in their respective regions. It is no surprise that German fund managers are diversifying their property portfolios across France, especially given their experience of federalism and poly-centrism, which leads them to replicate the strategies they pursue in their German home markets. In doing so, they are reaping the rewards of recent political efforts to decentralise power and economic structures in France, which were restarted in 2003 and given fresh impetus by new legislation in 2013 to 2015.
French fund managers, in contrast, tend to invest in line with their tried and tested models. In a real estate industry whose most important players are traditionally based in Paris, the capital city attracts a clear majority of investment. Compared to German institutional investors, however, French investors are more willing to consider opportunistic investments in their own country, provided their portfolios as a whole are risk-diversified.
Tradition casts a large shadow over France’s institutional investors
As a result of these market developments, a growing number of German institutional investors, such as savings banks, insurance companies and foundations, are receptive to fund products with a significant proportion of property in France. The French real estate market is easy for them to understand. In addition, France’s real estate market is more transparent than the German market. In last year’s JLL Global Real Estate Transparency Index, the French market was ranked the fifth most transparent in the world, and the most transparent market in continental Europe.
So, while German investors exhibit high levels of interest in France, French institutional investors often find the German market to be overly opaque. This is partly due to the fact that Germany has seven top markets, all of which appear to be relatively equal in value to outsiders. The situation is further complicated by the large number of local players and the non-uniform real estate transfer tax system, with tax rates determined by each of Germany’s 16 individual state governments.
One of the first things fund managers who are looking to invest in France need to do is to establish a global network of market contacts and partners. This will enable them to put together a balanced portfolio of properties, both within and outside the EU, and thus achieve a broad diversification of their fund products. At the same time, the fund companies also need a local presence in order to establish the personal business relationships that are so important in the French market. More than anywhere else, the markets in France’s regional cities are dominated by local market participants. Negotiation cultures vary so widely, so it is crucial to work with local representatives. French negotiating partners place great emphasis on personal relationships and continuity – far more can often be achieved over an extended lunch than via hours and hours of meetings. Germans, on the other hand, have no objection to dispensing with face-to-face contact during contract negotiations if they have to. For international fund managers, it is therefore extremely important to establish long-term local market access if they hope to leverage the full potentials of the French office market for their investors.