The office market in the Greater Paris Region

The office market
in the Greater Paris Region
On Point
I2
nd
quarter 2015
Copyright : Antonio GAUDENCIO
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Key
messages
Paris La Défense launches its Strategic
and Operational Project (SOP)
Paris La Défense, covering 564 hectares centred on the Grand Arche, is Europe's
leading business district with nearly 4 million sq m of office space, which in 2014
encompassed 11% of surface area marketed and 15% of investment in the Greater Paris
Region. The district is currently considering possibilities for its future redevelopment,
with the intent of repositioning itself within the Greater Paris Region, with a focus
on the Paris Greater Metropolitan region (the Métropole du Grand Paris).
In addition to being the principal employment hub with 160,000 employees, of which
57% are executives, Paris La Défense also hosts more than 500 companies of which
40% are foreign, 20,000 residents, 245,000 sq m of retail units, 45,000 students
and draws over 8 million tourists.
In an effort to maintain the appeal of this economic sector and to bolster the position
of Paris La Défense as the economic gateway of the Greater Paris Region,
the “Etablissement Public d’Aménagement de la Défense Seine Arche” (EPADESA)
is preparing a planning and development strategy for the sector, with a fourfold
objective:
• Modernize the business district and open it up to the surrounding area. This first
initiative led to a target to continuously refurbish 150,000 sq m each year, to pursue
the Renewal Plan initiated in 2007, and to maintain the quality of the stock at the
site. Property modernisation will take place alongside the redevelopment of public
spaces, ensuring continuity between the urban environment within the business
district and the surrounding areas;
• Make Paris La Défense a place to live by expanding its housing stock.
EPADESA is currently working to “develop social dimensions” in the La Défense
Seine Arche sector. To achieve this goal, the construction of 400 new homes per
year is planned within the area, supplementing the existing stock of 150,000 homes
that can be reached in less than 20 minutes. Housing stock expansion is one of the
first steps toward enhancing the area's appeal;
• Achieve the quality revolution. Consistent with the previously mentioned
objectives, EPADESA intends to enhance the services, shops and public facilities
available at La Défense Seine Arche, to transform it from a business hub to a social
hub;
• Contribute to the international prestige of the Greater Paris area. An initiative
is currently under way to establish and enhance the “Paris La Défense” brand to
build upon the business district's international reputation, while taking part in a
coordinated initiative with the Paris region's other major business hubs to enhance
the prestige of the entire metropolitan region.
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Latest
from the market
Passing grade for the market
in the 1st half of the year
The leasing market has returned to normal over the second quarter
After a lacklustre 1st quarter with 412,000 sq m placed, the leasing market improved
slightly during the 2nd quarter to surpass 503,000 sq m, bringing its performance
for the first half of the year above 915,000 sq m. Despite this, the market has not
overcome the slowdown it faced in the 1st quarter, recording a drop of 22%
in the Greater Paris office market compared to the previous year.
Upon analysing the market by surface area bands, once again transactions over
5,000 sq m suffered the most, with only 9 new transactions recorded in
the 2nd quarter. Notable transactions were the OECD's lease of the entire “In/Out”
building (~33,000 sq m), delivered during 2013 in Boulogne-Billancourt, and RFF's
lease at “Le Coruscant” (~15,000 sq m) in Saint-Denis. These transactions come
in addition to the 12 which were completed during the 1st quarter, including
the consolidation of various Government departments at “Ilot Fontenoy - Ségur”
(~43,000 sq m) in the 7th district of Paris.
Small and medium-sized surface areas (less than 1,000 sq m) showed solid
performance, representing 40% of the total surface area leased in the Greater
Paris Region during the first half of the year (an increase of 10% over the previous
year). This was the only segment that showed a favourable trend from one year
to the next, possibly reflecting the improved health of small and medium sized
businesses, as well as a trend among large companies to take up extensions close
to their principal offices rather than undertaking major relocations. For mid-sized
transactions (1,000 - 5,000 sq m), the trend is consistent with but less marked
than the 1st quarter, falling by 7%: mid-market companies are always looking
for ways to streamline costs, thus leading to reductions in surface area.
Generally speaking, we note that falling rents in established markets have
allowed them to attract users that would have been positioned in more
affordable markets one or two years ago. Once again, 1 sq m out of every 2
was taken up within the Paris city during the first half of the year, performance
that significantly exceeds its typical 35 to 40% ratio. Although square meters taken
up in the CBD remain at similar levels, the INRIA transaction at “Trio Daumesnil”
(~9,800 sq m) had a positive impact on take-up in Paris 12-13. The markets
continue to struggle in the inner suburbs, although certain have benefited
from the completion of transactions in excess of 5,000 sq m such as the Southern
Bend (OECD) or the Inner Northern Suburbs (RFF). The same trend can be seen
Cumulative take-up
Source: JLL/ImmoStat
Thousands of sq m
Q1
Q2
Q3
Q4
Number of large deals
> 5,000 sq m
Source: JLL/ImmoStat
35
1st half
2014
-14
21
1st half
2015
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in the Outer Suburbs, particularly in the Saint-Quentin-en-Yvelines market, where
the NISSAN transaction at “Le Krebs” in Montigny-le-Bretonneux was recorded
in the 2nd quarter.
Vacant stock in the capital region rose just slightly, in the 2nd quarter exceeding
the symbolic threshold of 4 million square metres of office space, a vacancy rate
that remains at 7.6% for the entire Greater Paris Region. Square metres of empty office
space in the capital, as in the Central Business District (5.3%) remain contained, with
an average vacancy rate of around 5%, with rates remaining very low in Paris
5-6-7. The discrepancy between Paris and the inner suburbs remains significant,
with a majority of these latter markets exceeding the 10% threshold. Thus, stock
remains abundant in the inner suburbs, particularly in the Western Crescent where
over 1 million square meters of office space are vacant (excluding La Défense).
In La Défense, the vacancy rate levelled out during the 2nd quarter and currently
stands at 11.7%.
Changes in prime headline rents have varied from one sector to another,
but generally remain within the lower range of values. While prime rents
in the Central Business District have fallen to €710, in La Défense it remains generally
stable at €525/sq m/year. Turning to incentives, they currently average nearly
19% in the Greater Paris Region, ranging from 15% in the Paris city centre (lower
in certain Parisian districts) to 20% on average, for the entire Inner Ring. All of this varies
based on the size of rented surface area and the length of the firm commitment
period, as well as the strategies used by landlords, which remain highly flexible
on the rental terms offered to their tenants, whether working to retain them or attract them.
Vacancy rate as at 2nd quarter
Source: JLL/ORIE
Vacancy rate of the quarter
In %
> 15%
10 to 15%
8 to 10%
6 to 8%
4 to 6%
< 4%
Rent - Central Business District
(€/sq m/yr)
Source: JLL
Prime
740
710
Average
Grade A
675
2nd quarter 2014 2nd quarter 2015
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Copyright Lavigne
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The investment market picked up steam in the 2nd quarter, before entering
the very promising second half of the year
The 2nd quarter 2015 will not be a landmark period for the investment market,
with €1.79 billion invested in the Greater Paris Region. Taken as a whole, total
investment reached €5.385 billion, down 38% as compared with June 2014. This dip
in the market is due to a lower number of new marketings at the end of last year,
rather than a drop in investor activity. A number of new products are currently being
marketed, and should close during the second half of the year, lifting expectations
for a dynamic second half of the year in the Greater Paris Region.
The 2nd quarter recorded few deals in excess of €100 million, with only 4 transactions
of this scale. The largest was the sale of “Tours Pascal” to the GOLDMAN SACHS/
ALTAFUND joint venture for €190 million, followed by the acquisition of “Colisée III
and IV” by AMUNDI from BLACKSTONE for €159 million. After a dynamic start
to the year, major transactions fell by 51% in terms of volume and by 10% in terms
of number as compared with the same time the previous year. This drop must be
considered in context, however, given the exceptional size of certain transactions last
year, with two sales exceeding €1 billion during the 1st half of 2014. It must be noted
that, up to the threshold of €500 million for a single investment, the market
finally showed more vitality in the 1st half of 2015 than in the 1st half of 2014,
recording a 10% rise in invested volumes.
The market is dominated by French investors, who are extremely active in all size
brackets. Life insurance companies and entities that collect deposits from individuals
are especially active, finding in real estate investments yields that are no longer
available from bonds. Foreign investors are focused on the largest properties,
with two of the transactions over €100 million in the quarter involving sales
to international investors. Finally, though yet not reflected in the figures, Chinese
investors, who have been exclusively positioned in the hotel market, are now
present in the office market and have made proposals. At the end of the 1st half
of the year, distribution of invested volumes was consistent with traditional
market equilibrium, with 57% of acquisitions made by French investors, versus
43% made by international investors.
The market is again heavily dominated by investments in office properties, accounting
for 85% of invested volumes at mid-year. While the 1st quarter saw ORION sell
its interest in the “Qwartz” shopping centre to ALTAREA COGEDIM for €200
million, transactions in the 2nd quarter exclusively concerned city centre retail,
with two transactions on “avenue Montaigne” totalling over 200 million in investment,
along with a sale on “rue du Faubourg Saint-Honoré”.
Volumes
invested
Total
investment
volume
Source: JLL/ImmoStat
€ billion
Q1
Q2
Q3
Investment deals
Source: JLL/ImmoStat
17
Deals
> €100 M
Q4
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Under the pressure of ongoing high demand, real estate yields as a whole
remained stable despite the OAT-yield-rise. Increasing from 0.65% at the start
of April to 1.20% at the end of June, it nevertheless only achieved its levels of last fall,
and at this level the risk premium offered by real estate remains competitive at over
200 bps. Yields remained stable in most markets: In Paris, transactions are currently
falling below the 4% yield threshold, and we have noted sales at below 5% within
the Inner Ring. Marginal yields reductions occurred during the 2nd quarter in certain
Parisian markets, such as the Left Bank and the eastern parts of the capital.
We note that the forward funding market has benefited from the pursuit of higher
yields, rising to €826 million invested by the end of the first half of the year.
Although amounts invested in the 2nd quarter were more modest than at the start
of the year, all forward funding sales recorded were speculative transactions. We also
note that the investors taking an interest in these speculative projects are institutional
players. The forward funding market should continue to grow over the coming
months, with approximately fifteen speculative transactions currently under way
with an investment volume of €1.6 billion.
"Between Tower", La Défense
Source: Eurosic
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Outlook
Since the spring, the outlook for economic growth in France has improved.
INSEE has confirmed that GDP grew by 0.6% during the 1st quarter, with economists
reaching consensus on predicted growth of around 1.2% for 2015. It appears
that the recovery finally broadening, as the factors driving growth are both household
consumption and, more recently, corporate investment. Business climate indicators
have slowly risen toward 100 points, a sign of gradually improving confidence, while
the PMI Markit Index confirms improving business activity.
Are recent developments in the Greek crisis, with the “no” vote in the referendum,
likely to stifle this fledgling recovery? According to a number of economists,
economic ties to Greece are limited, and its potential exit from the euro zone should
not impact the French economy. However, prevailing uncertainty does not favour
a rebound in growth. At the same time, financial markets are showing signs
of nervousness, as evidenced by highly volatile stock prices.
The rental market
We expect improved market dynamics during the 2nd half of the year, especially
with regard to major transactions (greater than 5,000 sq m), since certain transactions
currently in negotiations should close during the coming weeks. In addition, business
strategies have proven volatile with respect to real estate decisions. While certain
companies might freeze a current project, others may be opportunistic, seeking to benefit
from favourable financial conditions that result from falling rents.
However, following a 2nd quarter above the 500,000 sq m threshold, the slowdown
experienced in the 1st quarter will not be overcome in the current environment.
Under these conditions, we expect take-up of around 1.9 million square metres
of office space marketed in the Greater Paris Region by the end of 2015.
The markets offering quality stock at attractive rents, which will benefit from
the anticipated increase in activity. In an environment where companies are constantly
seeking to restore their margins, headline rents should not see significant
changes over the rest of the year. The same applies to incentives granted
by landlords, who continue to show flexibility to attract new occupants, or to retain
tenants already in place.
GDP growth
in Greater Paris Region
Source: Oxford Economics
GDP
France Forecast
GDP Greater Paris Region
Greater Paris Region Forecast
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The investment market
A number of properties are currently being sold on the investment market:
pan-European portfolios with French properties, such as the “Aqua” portfolio being
sold by UNION INVESTMENT which includes several Parisian assets, the “Viking”
logistics portfolio sold by TIAA, a significant number of speculative forward funding
sales, and assets sold due to the end of the existing French-Luxembourg tax treaty.
The second half of the year will be active in the Greater Paris Region, with
the amount of investment expected to reach approximately €15 billion in 2015.
At this time, the crisis in Greece is creating volatility in the financial markets which,
outside of any private funding crisis, leads to a growing pool of capital being driven
to real estate. Thus, we do not expect a crisis in real estate demand. On the contrary,
the market will remain buoyant. Because of sustained demand and OAT yields which
seem to be stabilising at around 1.25%, pressure on rates will remain high in the coming
months.
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Notebook
Global investment markets are performing well
The real estate investment market continued to grow during the 1st quarter
of 2015, with volumes up by 13% (excluding currency effects). Prime yields
on office space reached record lows, but the risk premiums remained generally
sufficient. Thus, yield compression remains a possibility in 2015.
The United States was the star of the market at the start of the year, posting
a 24% increase in activity. The largest transactions took place there, such as “1095
Sixth Avenue” in New York, sold by BLACKSTONE for $2.2 billion. Japan has led
the way in Asia, posting more moderate growth. Major transactions were also
recorded there, such as the sale of “Meguro Gajoen” in Tokyo, an office complex sold
by MORI TRUST for $1.175 billion. Volumes invested in Europe have posted less
dynamic growth due to the decline of the euro against the dollar. A number of major
transactions also took place in Europe in the 1st quarter, especially concerning retail
and hotel properties such as STARWOOD's sale of GROUPE DU LOUVRE for over
$1.4 billion. In addition, we note the sale by HINES of “Porta Nuova”, a major mixed-use
development in Milan, to QATAR HOLDING for over $1 billion.
In a favourable economic and financial environment, where financing is available
at an attractive cost, investment volumes should again increase in 2015.
On a global scale, we expect an increase of at least 5% of invested volumes,
i.e. approximately $740 to 760 billion.
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Commercial real estate and taxation
in the Greater Paris Region
Since 2010, taxation on real estate has sky-rocketed: +50% in taxes over the past
5 years. In its most recent study published in June 2015, the “Observatoire Régional
de l’Immobilier d’Entreprise” (ORIE) counted 5 taxes applicable to construction
of commercial premises, 14 on their operation and 9 on their sale/purchase.
These inflated taxes weight heavily on transactions. Simulations show
that, for the construction of 5,000 sq m of office space in the inner Paris suburbs,
the TA (planning tax) and the RCBCE (tax on creation of offices, retail shops
and warehouses) , represent two thirds of the cost of the land, 10% of the cost price
and 7% of the property's market value. Every year, the public authorities impose
additional taxes on building operations. As for acquisitions and sales, they are currently
taxed at the 33.33% corporate tax rate, compared with 19% 5 years ago, whereas
in Europe, average rates fall between 15 and 20%.
This tax inflation comes in addition to a constantly changing system, which in no way
improves the transparency and effectiveness of the tax system in place. Even worse,
there is a genuine disconnect between the intended goals of these taxes
and their actual impact on the country. Taxation has become a preferred funding
methods for public players. These taxes rely specifically on property construction,
yet less construction is taking place than 10 or 20 years ago. At the same time,
amounts invested in asset swaps have never been so substantial. There is a shift
from a wealth generation market to one of value generation, which implies a clear
change in tax policy in the Greater Paris Region.
Faced with this analysis, ORIE has proposed that taxation be simplified
and changed to adhere more closely to the current economic cycle,
and proposes the following courses of action:
• Action item no. 1: establish a regional share of stamp duty for buildings located
in the Greater Paris Region, which would apply to commercial and residential
properties. This action is based on the concept of shifting taxation to the creation
of value, since stamp duty only applies to transactions. These new revenues would
enable the RCBCE to be reworked, or would even permit elimination of the most
recently created taxes, and would generate approximately €150 million per year;
• Action item no. 2: reduce the amount of the RCBCE by 20% in zone 1 (Paris
and Hauts-de-Seine), by 75% in zone 2 (Paris urban unit) and eliminate the tax
in zone 3;
• Action no. 3: eliminate or reduce the most recently created taxes; reduce levies
on underground parking taxed as under the TA; postpone the due date for planning
taxes to the Date of Declaration of Start of Works (DROC), rather than the planning
permission filing date.
1
2
Planning tax (Taxe d’aménagement)
Tax on creation of offices, retail shops and warehouses
Copyright : Eisenhans
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Great success for “Réinventer Paris”
(Reinventing Paris), a call for innovative urban projects
Launched at the end of 2014 by Anne Hidalgo, Mayor of Paris, and led
by Jean-Louis Missika, Deputy Mayor in charge of town planning, architecture,
the Greater Paris project, economic development and attractiveness, this project
involves the rehabilitation of 23 sites located in the Paris city centre, owned
by the City of Paris. Distributed across 9 Parisian districts, the sites are located
in both the historic city centre and at the edge of the ring road. A panel will be chosen
for each site, and will be asked to select the best project.
After receiving 800 project proposals, 372 of them have been officially filed at City
Hall. Some of the sites have clearly inspired certain candidates, with the site
at Clichy-Batignolles (17th district) receiving the largest number of proposals
(29). It is followed by the Parmentier electrical sub-station in the 11th district,
built in the early 20th century, and a nearly 1,400 sq m parcel located at 1 rue
de l'Ourcq in the 19th district.
The 372 projects will be reviewed over the summer by panels that include Deputy
Mayors of Paris, representatives from all of the Paris City Council's political groups,
mayors from the applicable districts as well as neighbouring cities, experts working
with the City, the “Commission de Vieux Paris” (Commission on Old Paris) and
the “Conseil Parisien de la Jeunesse” (Paris Youth Council). Only 3 or 4 candidates
will be chosen at the end of deliberations, to be announced in mid-July.
The final selection will be made by an international panel, with the winners
to be announced in January 2016.
Source: JLL
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Triangle Tower (Tour Triangle): the latest plans
are approved by the Paris City Council
Just days after granting planning permission for the Samaritaine project,
on 30th June 2015 the Paris City Council approved the second version
of plans for the “Triangle Tower”, to be built at the heart of the Porte
de Versailles Exhibition Centre in the 15th district of Paris. Rising to 180 meters
over 42 floors, with a façade 150 metres long and 35 metres wide at the base,
the tower will be the third highest in Paris after the “Eiffel Tower” (324 metres)
and the “Montparnasse Tower” (210 metres).
Initially submitted at 92,500 sq m, including 88,000 sq m of office space,
with the remainder divided between a ground floor atrium, a 1,400 sq m conference
centre, a child-care facility, a care home, an observation deck and a restaurant
at the summit, the plans were initially rejected on 17 November 2014. The reasons
given included excessive office space, the lack of continuity between the tower
and the surrounding area, the Exhibition Centre, and the absence of hotel rooms
when there seems to be a shortage of stock in Paris and the inner suburbs.
In light of this, the HERZOG & DE MEURON project was revised. Office surface
area was reduced by 12% to 69,900 sq m. In addition to the previously planned
facilities (child-care facility, health centre, etc.), the remaining 22,000 sq m will house
a 120 room, 4-star hotel between the 12th and 17th floors with surface area of 7,700 sq m.
This facility is in addition to two other hotels opening at the Exhibition Centre (Parc
des Expositions). Dining options were also enhanced, with additional dining located
on the 12th and 13th floors.
A 2,240 sq m co-working centre has also been proposed for start-up companies
and Exhibition Centre users. The initially planned conference centre was expanded
to incorporate a 550 sq m cultural centre. This space, to be managed by the City
of Paris, will host exhibitions and shows related to art, design and architecture.
Finally, an additional 1,650 sq m of retail space was also included.
Construction of the tower will take between 5 and 6 years and create 5,000
jobs. Its cost is estimated at €500 million, i.e. one-half of the proposed budget
for renovation of the Exhibition Centre. Once delivered, the tower should generate
€10 million in fees and taxes, and will host 5,000 jobs.
Source: Unibail-Rodamco
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ICC, ILAT and ILC: negative indexes
in the 1st quarter of 2015 for leases subject to the ICC
Following a rise in the index over the past two quarters, the ICC started the year
with a slight contraction. It posted a value of 1,632 in the 1st quarter, declining by 0.97%
year on year (versus a 0.62% rise in the 4th quarter).
The ILAT index was also published at the same time, and continued its annual growth
pattern with a moderate increase of 0.29% over one year. The index reached 107.69
in the 1st quarter of 2015.
Finally, with regard to commercial leases, the ILC began with a slight decline,
reaching 108.32 in the 1st quarter of 2015. For over two years, the commercial rent
index has remained relatively stable, continuing to fluctuate between 108.32
and 108.53.
Comparison of ICC, ILAT and ILC changes
Source: INSEE
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Virginie Houzé MRICS
Head of Research France
Research Department – Paris
T : +33 1 40 55 15 94
[email protected]
Manuela Moura
Consultant
Research Department – Paris
T : +33 1 40 55 85 73
[email protected]
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Paris
40-42, rue La Boétie
75008 Paris
T : +33 1 40 55 15 15
F : +33 1 46 22 28 28
Le Plessis-Robinson
Centre d’affaires la Boursidière
RN 186 BP 171
92357 Le Plessis-Robinson
T : +33 1 40 55 15 15
F : +33 1 46 22 28 28
Lyon
55, avenue Foch
69006 Lyon
T : +33 4 78 89 26 26
F : +33 4 78 89 04 76
La Défense
Cœur Défense
100-110 esplanade Charles de Gaulle
92932 Paris La Défense cedex
T : +33 1 40 55 15 15
F : +33 1 49 00 32 59
Saint-Denis
3, rue Jesse Owens
93210 Saint-Denis
T : +33 1 40 55 15 15
F : +33 1 48 22 52 83
Marseille
21, rue de la République
13002 Marseille
T : +33 4 95 09 13 13
F : +33 4 95 09 13 00
www.jll.fr
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