French commercial property returns to capital growth

French commercial real estate values rebounded at a faster rate over the second half of 2010, at 2.8%, an increase of 110 basis points on H1, according to the IPD France Bi-Annual Property Index.

Over the second half of 2010, an income return of 2.9% led to a 5.8% total return - the highest bi-annual performance in the indices' three-year history. The return to capital appreciation in 2010 brought an end to 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 reversed with a 40 basis points yield compression helping to deliver the first rise in values in two years. This capital appreciation trend accelerated over the second half of the year. Market rents were flat for the first half of the year, before falling mildly in the second.

The IPD France Bi-Annual Index, which measures 1,427 commercial properties worth around EUR 34.5 bn, revealed that the strongest capital appreciation was in the Paris Central Business District (CBD) and the West CBD/ La Défense district, which respectively grew by 4.0% and 4.1%. Shopping centre values, last year the most resilient segment, 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, with logistics recording the steepest declines of -1.9%.

'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 of their values,' said Stéphanie Galiègue, managing director of IPD Southern Europe. '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.'