French annual property returns slip into negative territory, says IPD

Investment in French real estate markets delivered a negative return in 2008, at -0.9%, for the first time in the 11-year history of the IPD French Property Annual Index. After three successive years in which total returns were above 15%, French markets finally succumbed to property markets' re-pricing cycle which has swept the globe.

The biggest sector drag on overall returns was industrials, at -3.8%, followed by offices, at -2.5%, while retail returned the best figures of the main sectors, at 1.9%. The residential market also remained above water last year, returning 1.5%.

Rising yields across the sectors - particularly in industrials and offices, which ended 2008 at an average of 7.5% and 6.2%, respectively - drove capital values downwards. Capital growth on all property last year was -6.0%. Industrials and offices turned in the biggest capital decreases, of -10.1% and -7.9%, respectively.

At the sub-sector level, the most significant negative capital growth returns were within logistics, at -11.0%; workshops, at -8.5% and central offices, including the Paris Central Business District and the Western Central Business District, which returned -8.3% and -9.1%, respectively. In retail and residential negative capital growth returns were more mooted, returning -3.4% and -1.9%, with shopping centres proving relatively resilient, returning -2.5%.

Overall income returns in 2008 were virtually on a par with 2007, falling just 10 basis points to 5.4%. The robust levels are owed to low vacancy levels and strong rental indexation. Over the long-term, French real estate total returns for three, five and 10 years on an annualised basis were 12.5%, 12.6% and 11.7%, respectively.

Christian de Kerangal, Managing Director at IPD France & Southern Europe, said: 'The arguably mild negative capital growth, at -6.0% for 2008, was moderated by strong cashflows within institutional investors' portfolios. This was due to a series of complementing factors: overall vacancy rates falling back to 2003 levels, strong rental indexation and the positive rental re-negotiations, the majority of which occurred mainly during the first half of the year.'

He added: 'In addition, last year saw strong rent passing growth and still rising open market rental values. However, despite the positive overall figures for vacancies, some segments, notably logistics, recorded a rise.'