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6th December
7th December
Corinthia Lisbon
Real Estate

Where is the residential market headed?

After two better than expected years during the pandemic, how can the sector maintain its growth rate going forward?

5 MIN READ June 29, 2022

While the French residential market has shown resilience through the toughest of the health crisis, as a consequence of the current economic scenario, the sector is predicting a slight downturn in 2022. 

Growth is expected to be constant and positive, as the world recovers from the pandemic, but less dynamic than previously anticipated, due to recent geopolitical events. The outbreak of the war in Ukraine has brought enormous uncertainty and has put households and businesses once again on standby mode. 

Although France has little dependency on Ukraine or Russia in terms of energy, food and industry, the impact on commodity prices and supply chains has been immediate and felt on all economic indicators in Q1 2022. Similarly, the conflict caused the rise of inflation and in prices and the tightening of financing conditions which in turn have cut down the purchasing power of the French population leading to a slower growth pace.

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The residential market throughout the pandemic

The residential market has remained strong during the health crisis, with house prices rising a record 6,4% in 2020, the highest rise in a decade, followed by 5,85% in 2021. An increase in sales was observed in 2021 in Greater Paris as well, in particular in second hand (+12% year-on-year) and new homes (+10%), mostly due to the advantageous loan terms and the belief of the property as a safe investment. 

The lack of restrictions on foreign ownership in the country and main shifts in buyers’ behaviour, as a consequence of Covid-19, also contributed to this outcome. With nearly the entire population on lockdown, the need for more space felt urgent and people started to search for bigger houses, with leisure areas and further away from the big cities.

A recent study by the University of Paris and King’s College London found that almost half of Parisians are of the opinion that the city is too expensive. This, together with the recent possibility of working from anywhere in the world, has led a significant amount of people in a kind of exodus to smaller but cheaper and greener cities. 

However, the excellent results of previous years have created an imbalance between supply and demand. If the real estate market is immune to Covid-19, the supply chain isn’t. With constructions in decline since 2019 and too slow to meet current demand, 7% below the 2011-2020 average, it’s still difficult to predict whether the slight upturn started in 2021 will be amplified in 2022.

The reasons for that are at least threefold: the rise in the cost of raw materials affecting construction costs, supply chain disruptions delaying production, and the scarcity of land. In this respect, players in the homebuilding industry are calling for strong governmental measures to support recovery.

Investissement résidentiel en France

In spite of everything, residential is back in the investors' minds

Worldwide, the volume of investment in residential housing in 2021 was almost 450 billion euros, while in Europe, it exceeded 100 billion euros, and up to nearly 20 billion euros in the first quarter of 2022 alone, fueled by the acquisition of 85% of CDC Habitat's Lamartine portfolio of 7,600 housing units in a clear demonstration of investors’ appetite for this asset class that is second only to offices.

On the investors’ end, the residential asset has proven to be consistent and safe in times of uncertainty. Residential property has been back on focus this year and will continue to do so, according to a fund manager recently interviewed: “We certainly saw clients kind of shift and pivot towards more resilient asset classes, such as the living sector, which would cover student affordable housing, private rented sector, build to rent senior living, etc”.

In this context, it’s imperative to say that the market is certainly going strong, but never without its challenges. With the results of the legislative elections possibly affecting governability, construction costs raised by inflation, lack of supply, lower purchasing power, an upcoming cap on residential rent prices by the government, tighter access to loans, and many other variables, it’s safe to say as an investor, in an ongoing disrupted environment, paying close attention to market fluctuations is vital.

Discussions will continue at the next GRI Club Meeting on the residential market, July 5th, in Paris. Participants will talk about office conversion into residential projects, tax incentives, Elan law, lenders' perspectives, investment in secondary cities, among others. 

A Club Meeting is an in-person meeting for small groups, exclusive to GRI Club members where the most experienced executives in the real estate market discuss industry trends and issues.

Written by Roberta Gomes 

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