FRANCE - Property experts have predicted the French real estate industry is set to deteriorate even further in 2009 as a result of the financial crisis and will have to adapt itself to investors' demands in order to recover.

Analysts at last week's Atisreal Anée Immobiliere said liquidity problems and a lack of investor confidence could weaken the French real estate market and lead to higher vacancy rates and an oversupply.

Max Le Roux, chairman of Atisreal France, said: "The crisis is there and it's a global crisis and France won't be able to escape it. We will have to adapt our supply to the demand by matching it with quality assets at competitive prices."

Rising vacancies, more newly-completed buildings and the fall in net absorption are likely to drastically increase supply in the secondary office market in 2009 and 2010. Experts have also predicted further declines in take-up and office rents across France resulting from the prolonged economic downturn and rising unemployment.

Take-up in Central Paris could plunge by 35% this year, while the European office take-up index could drop by 25%, according to Atisreal's Outlook 2009 paper. The regions markets are expected to be more resilient.

During 2008, Marseille and Aix experienced the biggest drop in transactions in the secondary office market as a result of companies restructuring and regrouping in new buildings. Lyon, Strasburg and Toulouse maintained the same levels of transactions seen in 2007, helped by their more mature markets.

Antoine Bary, development director for Atisreal Consult, has called for greater renovation in the secondary market to combat oversupply, arguing it would also be an opportunity to bring buildings into line with the environmental legislative framework and keep sustainability at the top of the agenda.

He warned there would be "fierce competition between existing products" and claimed landlords would have to be more flexible with their tenants' demands.

Thierry Laroue-pont, vice chairman of Atisreal France, said: "The vacancy rate and supply is increasing. In both cases the message is very clear: divide, renovate and negotiate. We have to adapt to the user."

In the main French markets, transaction volumes were 33% lower in the fourth quarter of 2008 compared to the same time last year. The Central Paris market dropped by more than 55% for the year, while the regional markets did slightly better.

Commercial real estate investment in Paris could drop by 13% and prime initial yields could rise by 50 basis points, according to the outlook report.

Warehouses and logistics markets in France have become more important in France in recent years and as a result are expected to do better at weathering the crisis.

Large equity-rich investors like insurance companies are predicted to be the key players in France's real estate market, however experts said it is unlikely the market will recover until 2011.

According to Atisreal, the profile of investors investing in France changed in 2008, with Anglo-Saxon funds and Société d'Investissements Immobiliers Coteés (French listed property companies) becoming less active. Pension funds, life insurances and unlisted vehicles, on the other hand, continued investing.

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