FRANCE - The recovery in French commercial real estate market gained significant momentum in the second half of 2010, producing total returns of 5.8%, according to Investment Property Databank (IPD).

Latest figures from the IPD France Bi-Annual Property index show that French commercial real estate values rebounded at a faster rate over the second half 2010 than they did during the first six months, recording an increase of 2.8% - 110 basis points higher.

Over the second half of 2010, income return of 2.9% contributed to a 5.8% total return - the highest bi-annual performance in the index's three-year history.

The return to capital appreciation in 2010 brought to an end a two-year 17% slump in values.

Last year proved a turning point in French property markets. In the first six months, the driving influence on capital growth - yields - reversed, with a 40bps yield compression helping to deliver the first rise in values for two years.

This capital appreciation trend accelerated over the second half of the year, while market rents were flat for the first half of the year, before mild falls in the second.

The IPD France Bi-Annual index - which measures 1,427 commercial properties worth approximately €34.5bn - reveals the strongest capital appreciation in the Paris Central Business District (CBD) and the West CBD/ La Défense district, which respectively grew by 4% and 4.1%.

Shopping centre values, which were the most resilient segment last year, rose by 3.5%.
Logistics properties, however, saw a 2.1% capital decline over the second half of 2010 - the only segment to continue to register capital depreciation.

Yield compression continued over the second half of the year in all segments, while market rental values have dropped in almost all segments, and logistics recorded the steepest decline of 1.9%.

Stéphanie Galiègue, managing director at IPD Southern Europe, said: "French property values continued to rise over the second half of last year after a steep yield-driven repricing cycle, which caused French real estate to shed a fifth off their values."

She added: "Since mid-2009, we have seen quite a lot of cash-rich investors seeking to buy prime stock - properties in prime locations, with financially strong tenants on longer leases.

"With demand outstripping supply in this part of the market, yields have reduced rapidly, re-emphasising the yield spread between prime and secondary properties."