XX1066-Immobilier et Perspectives-Septembre-2010

Real estate
n°13
trends
Quarterly letter of La Française AM | September 2013 - Finished drafting 16 | 09 | 2013
Convictions
and Strategies
Is the French investment market thawing out?
Something is going on in the property investment market....
Since early 2013, several major deals have gone down that aim
to create value and not just obtain secure rental income, which
could be a sign of a thaw in the «risky» assets segment. Until
the onset of the financial crisis in 2008, a raft of strategies was
simultaneously deployed across all levels of risk. Since then,
the market has been driven by risk aversion and pared down
to its safest segment, to the point of creating a persistent and
paradoxical shortage of core products on the market.
The return of «value added» transactions
However, the first eight months of 2013 saw, on the office
space segment in Ile-de-France, the return of deals containing
rental risk (partial or total vacancy, risk of renters leaving,
short-term leases, etc.) and/or renovations.
In Paris, a German fund paid €283m for a 28,000m² space
on rue Lafayette that is currently being vacated by Areva. The
investor is expecting the vacancy but also foresees pocketing
a capital gain when the building is subsequently rented...
At La Défense, an American fund was even more ambitious
buying (for €214m) the Tour Pacific totalling 53,000m². Built
in 1992, it needs major work and has been partially vacated.
Amid a rental market in La Défense with many spaces available
second hand and rising vacancy rates, the investor is expecting
to reposition the asset and cash in on the gain. Such a
deal was unthinkable just a few months back...
Several deals by opportunity-seeking firms, particularly the
Americans, are in the pipeline as they seek to capitalise on
the funding troubles of certain property owners.
A risk-friendly environment
Several factors came together to create an environment
favourable for these deals to go through:
•T
he bet that the recession in the euro area would
generate opportunities (rental cycle bottoming out,
struggling owners), which triggered a record wave
of capital raising by opportunistic fund managers in
the US;
• The recent sentiment that the worst of the recession is
over and thoughts of a recovery in the property markets
can now be entertained;
• Highly-favourable lending conditions and the re-opening
of financing for risky assets;
• The analysis of a medium-term shortfall in quality new
property on the main office markets in Ile-de-France.
"Core" is still the strongest market segment
However, the emergence of deals seeking value added instead
of return does not mean funds will be diverted from the core
markets. In fact, the lion’s share of property investors remain
risk adverse and are keeping their chips on safe assets.
Nevertheless, these two kinds of strategies complement one
another: core buyers ensure the liquidity of repositioned assets
while value added investors work to revitalize the property
market. Far from pointing to a deterioration in the market,
the re-opening of the value-added segment is a sign that it
is improving.
Real estate in its economic
and financial context
Economic environment: a break in the clouds?
Surveys from this summer yielded positive signs. After
two consecutive quarters of lower GDP in volume, in
Q2 2013 GDP grew 0.5%; growth at the half-way point was
in fact positive (+0.1%). Business sentiment and consumer
confidence brightened, spending on cars recovered for the
first time since end-2011, exports and imports rebounded, and
unemployment’s forward march slowed (-10.5% in Q2 2013,
up just 0.1% from previous quarter). These positive results
are still tenuous: a post-recession bounce doesn’t necessarily
translate into a sustained economic recovery.
Growth forecasts for 2013 remain very low at+ 0.1 %
according to official French statistics (INSEE). Although
household consumption increased 0.3% in Q2 partly because
they spent more on heating during the seasonably cool spring,
it dropped
0.8% in June. The PMI index is still in contraction
territory,
and below the euro area average. Fiscal and tax
constraints
weighing on households and companies continue
to hold
back
the recovery.
Lastly,
the gap between the United States, which has been
sending
signs that
an increasingly solid recover is afoot (2.5%
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and the euro area, which
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is still struggling (GDP growth of 0.3% in Q2 2013), is widening.
Emerging markets have encountered turbulence, except China,
which is expected to gather momentum towards the end of the
year after faltering somewhat. Global growth prospects remain
uncertain and heterogeneous.
Financial backdrop: are we headed for rising
interest rates?
Bond yields have begun a marked upturn since May 2013:
the yield on the 10Y OAT jumped by more than 50% in four
months (from 1.7% in early May to 2.65% in mid-September).
However, interest rates are still at historically-low levels.
Moreover, this increase was not motivated by any particular
fears of the situation in France, whose economic data was
mostly favourable in the second quarter of 2013. The spread
with German bonds has remained stable.
Rising interest rates have been driven, in particular, by the
Fed’s announcement that it will taper its economic stimulus
programmes by reducing liquidity injections, if unemployment
falls below 7%. It is also the sign of a stabilisation in the
European markets once the sovereign debt crisis settled
down. The ECB is maintaining a bearish stance aimed at
supporting persistently-weak European growth.
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2 Q uar terly letter of G roupe L a Française | September 201 3
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Assessment of
the French property market
Demand for rented office space in Ile-de-France
(in thousands of m2)
Annual rise in price of housing in France (seasonally-adjusted)
6
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The face value of rents began a moderate and uneven
adjustment
phase in H1. The pressure on rents has been
limited,
given
the increase in support measures that can
sometimes
total
30% of long-term leases.
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Residential real estate: between stagnation and
resistance
(see our inset on page 3)
Instep with improving consumer confidence in Q2 2013, annual
volumes
have recovered after several months of stagnating:
atend-June, INSEE data showed that the number of annual
transactions rose 2.9% from the previous quarter. However,
the long-term trend is bearish, as sales have dropped more
13% in one year. In order to stimulate the sluggish market,
than
the government has announced an exceptional 25% tax break
6
on capital
gains until mid-2014.
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Investors
still prefer safe assets though several «risky»
deals have revealed that risk aversion, which has dominated
landscape since the 2008 financial crisis, is receding.
the
Consequently, downwards pressure continues to be high on
yields,
which
reached
4-4.25%
best
in
have
on
the
assets
6
Paris. This pressure has also spread to business centres
on
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beyond, as yields have ducked under
the 6% bar for recent or rented buildings.
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Corporate real estate: dynamic investment, rental
market unease
During the first half-year of 2013, the ragged economy caught
up to the rental market: at 833,000m² of rented space, demand
decreased by nearly 20% year-on-year, hurt by the users’ waitand-see approach, a lack of major deals and the repercussions
on the volumes of renegotiated leases. However, amid a
plethora of better-than-expected macroeconomic data, rental
activity is expected, in the end, to hold up in 2013, at
approximately 2 million square meters. The start of the month
of September was also highlighted by ERDF signing a lease
for 30,000 m² in the future Tour Blanche in La Défense. An
earnest market recovery is not expected before a few quarters,
however.
On the
investment market, volumes in H1 held up well.
The summer
was fairly active, and invested volumes are
6
expected
to
exceed
€8bn at end-August. Over all of 2013,
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(€15bn).
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look a lot like it did in 2012
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Volumes invested in commercial property in France
(in €bn)
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Existing home prices are solid. In Q2, they increased 0.2%;
over the past year, the drop was contained to 1.1%. Despite an
unfavourable regulatory and economic backdrop, the structural
demand for housing in the most popular areas has been a
driving force behind the market.
For new homes in Q2, housing starts improved slightly
and pre-sold new housing increased by 9.3%. The return of
investors to the market reflects, among other factors, the
ramping up of the Duflot programme.
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September 201 3 | Quarterly letter of Groupe La Française
3
Focus on
The remarkable resiliency of the French real estate market
The reality has turned out much differently: several quarters
worth of data have clearly demonstrated that the imminent
correction has morphed into a slight erosion The latest
data has even shown an uptick in existing home sales (+2.9%
Q/Q in Q2 2013, INSEE) with prices holding up as well (+0.2%
Q/Q in Q2 2013, INSEE). Notwithstanding an outside shock,
this resiliency is poised to continue in the medium term.
In fact, unlike other markets, the structural configuration of the
French market is not likely to produce a severe downturn or
crash, like what has occurred in neighbouring countries:
• French banks have not suffered a serious crisis, partly
because individuals tend not to use mortgages to finance
their home purchases,
• housing production was very much held in check during the
boom,
• the lack of a rental vacancies and rents have not come down.
In addition, despite the worsening jobs picture and households
financial struggles, the French market is bolstered by good
demographic trends that, combined with insufficient levels
of new construction, have created a market that is perennially
lacking offer - although this situation is not uniform across all
regions of France.
Pre-sold new housing rebounded 9.3% year-on-year in Q2 2013
and has a number of factors driving it:
• structural lack of production compared with needs,
• the gradual return of investors, whether institutional or
individual (41% of new home sales in 2013),
• stocks tightly managed by developers who do not break
ground before half of the units have been sold.
However, beyond the sluggish economy, new constraints
are liable to disrupt the market. Regulations (universal rent
guarantee, rent controls, etc.) and taxation (transfer taxes,
etc.) could muddy the market and make the outlook cloudier.
Number of existing home transactions (12M aggregate)
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In no way does the information contained in this document constitute investment advice, an investment proposal or any type of recommendation whatsoever to invest in the financial markets.
The assessments presented herein reflect the opinion of their author at the date of publication and are subsequently liable to change. Under no circumstances may Groupe La Française be
held liable, in any way whatsoever, for any direct or indirect damages resulting from the use of this publication or the information it contains. This publication may not be reproduced, in part
or in whole, nor may it be disseminated or distributed to third parties, without the prior written approval of Groupe La Française.
Groupe La Française - 173, bd Haussmann 75008 Paris - France
Tel. +33 (0)1 44 56 10 00 - Fax +33 (0)1 44 56 11 00
480 871 490 RCS PARIS - www.lafrancaise-group.com
XX1822 - September 2013 - Groupe La Française Communications Department. Editing: Antonin Prade. Graphic design and printing: Groupe La Française.
After an historic rise in French property prices (+145%
between 1998 and 2011), there was a general feeling that
we had reached the peak of the cycle. In the US, Spain and
the UK, the residential markets plummeted and, although
those markets are different from the French market, it was felt
that this would inevitably lead to a fall in France, especially
given the new recession that struck the country in the winter
of 2012-2013.