French demand for safety turns investor crosshairs onto Core

At the end of the decade, Europe almost looked like a political drama with Brexit approaching and Germany and France facing a multitude of its own internal challenges. But has 2020 brought the French market clear skies, or are they merely in the eye of the storm?

GRI members met in late February to assess the last few years, and discuss where they were planning to go in 2020. They especially focused on real estate’s exposure to politics and how that could be limited, as well as how the investment cycle was currently looking. 
 

Still an uncertain economic climate?

From an macroeconomic point of view, the attendees unanimously agreed that the sector was still very much unpredictable. Not only did France still have its every evolving regulations and reforms, especially on pensions, but the upcoming US election calling the biggest fiscally conservative government into question, and the spreading of coronavirus putting strains on international partnerships is creating much uncertainty. 

Low or negative rates seemed to be less of a fear compared to last year but are subjects on which members remain alert, in particular concerning their potential impact on the real estate value. In general, it seems that the concept of the classical cycle has disappeared; according to several members, the investment cycle is no longer flat but an L (that is to say a steep decline followed by steady recovery.) 

Demand for security turns investor crosshairs onto Core

Faced with an economic situation where anticipation remains difficult, real estate - particularly in Paris - seems to position itself as an attractive option for local and international investors who turn to 'real’ assets. Theoretically, real estate should be a secure investment.

But does that mean an absence of risk? Far from it, claimed one of the members, as for her there were no projects without potential risk. For some people in the room, this brings core investments back into the crosshairs. Although there is a lot of capital in France and a drop in yields, the impact of the LTV on speculative financing would be very expensive and represent a potential risk, according to one participant. This would explain the return of a search for minimal risk in real estate.

These projects with limited risks should therefore become attractive again, but for other participants, the very existence of core projects would be debatable, the latter believing that faced with this L-shaped investment cycle, most projects fall under value-add.
 

Which asset classes provide the most safety?

For investors, residential assets remain a safe investment in the French market regardless of the current demographic challenges. Several members explained, however, that they were testing models of serviced residences and the subject of senior residences was raised. These products, which once garnered mixed interest from institutional investors, seem to be increasingly attracting interest from them. A portfolio approach is recommended to remedy the volume issues that may seem modest for the institutional target. 

A participant also highlighted 2019 showing an increase in retail and logistics investment. The case of logistics challenges was discussed and it seems to allow investors to leave Paris’ borders but at the risk of facing strong competition in the region. In addition, it would seem that logistics assets in urban areas offer higher returns than those offered by the office (around 4%, compared to just over 2%). The subject of land pressure was also raised, giving rise to new products and models of warehouses built high in peri-urban areas.

In general, and faced with an economy and an investment cycle still in the grip of potential risks, the participants of this session remained positive although cautious about the future results of real estate for this new year.


More information and upcoming debates on the French real estate market are expected during France GRI 2020, April 22nd and 23rd in Paris.

Article by Oceane Deslandes and Matt Harris