The Paris office market is being buoyed by good liquidity and limited supply but weak economic fundamentals continue to dog the letting side, PropertyEU’s France Investment Briefing heard on Wednesday.

The Paris office market is being buoyed by good liquidity and limited supply but weak economic fundamentals continue to dog the letting side, PropertyEU’s France Investment Briefing heard on Wednesday.

Take-up in the Paris office market, which is the biggest in Europe at some 55 million m2, was 272,500 m2 in the first quarter of 2015, compared to 508,900 m2 in the same period last year, according to research from CBRE. The number of deals was virtually unchanged at 665 compared to 662 in Q1 2014, as there were no major transactions over 5,000 m2 like in the first few months of 2014.

‘Of the 4 million m2 available as of April 2015, 21% is new or redeveloped, so there is definitely no oversupply in the market,’ said Nicolas Verdillon, executive director of capital markets at CBRE Paris. ‘We also feel comfortable with current vacancy rates of 7.2% for Ile-de-France and liquidity levels remain good.’

Rents are still lower than a few years ago but they are no longer sliding. The average is now €695 per m2 in the CBD, down from a peak of €771 in 2012, while in the Ile-de-France as a whole they are €297, compared to a €360 high back in 2001.

‘The figures are good, considering the economy has been flat in 2014, but there are concerns on the letting side,’ said Thibault Ancely, head of France for TIAA Henderson RE. ‘Asking rents are now in a more acceptable range but we really need employment to pick up if we want to be in safe territory.’

Besides concerns over employment levels, profit margins remain under pressure as taxes are high. ‘We are of the opinion that we are out of the black tunnel and rental rates are stabilising now,’ said Verdillon. ‘As an investor, I would put my money at the foot of the Arc de Triomphe, as quality buildings in the centre are few and buying one cannot ever be a mistake.’

‘My advice would be to invest in core locations where risk is very limited,’ said Ancely. ‘Not necessarily the CBD, but for example areas like la Défense, which is a very strong market. Take-up last year exploded from the year before, and it is one of the biggest transport hubs in Europe. I believe it has a bright future.’

The Grand Paris project with its infrastructure and development will open up new opportunities not just for la Défense but for other parts of the capital which are not now office areas, creating a ‘better city with better connections’, according to Ancely.

Regional prospects
While most investment continues to focus on Paris and the surrounding region, in the office market there is life outside the capital city, the briefing heard. Take-up in regional cities like Lyon, Marseille, Toulouse and Lille is growing as they attract investments, although big foreign investors may struggle to find the size they want.

‘We are very keen on Lyon, it is an easy market to understand and the town is easy to reach from Paris,’ said Ancely. ‘The mayor of Lyon has also been very good at marketing the city and implementing business-friendly policies, attracting international investors too.’

Transport links are key to the growth potential of a city. Bordeaux, for example, is poised for expansion as it should soon be even more easily reached from Paris via the high speed train. ‘We are also very happy with our investments in Dijon and Toulouse,’ said Ancely. ‘They are more difficult for foreign investors to spot and to exit, as they are less liquid, but they are an excellent long-term investments with good returns.’