New president will not affect flight to prime in France

Following François Hollande’s election as President of France yesterday, real estate professionals with an interest in Continental Europe's second biggest market may be asking themselves: should we be worried? In this analysis, Dr Walter Boettcher, Head of Research EMEA at Colliers International discusses the possible repercussions of the French presidential election, euro stress and the not so obvious flight to prime.

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Headlines in the lead up to the French election centred around the fact that many believed Hollande would bring ever more insecurity to an already uncertain eurozone. Hollande has stated his intent to renegotiate the German-French agreement with respect to the fiscal reform treaty agreed upon last December. This is the agreement which had brought greater market certainty and prevented a potentially catastrophic loss of international confidence in the eurozone. Given these commitments, the ECB initiated the Long Term Refinance Operation with the injection of some EUR 1 tln into the European banking system that together with the treaty brought further confidence and prevented a full-scale interbank liquidity crisis. To unravel this, by revisiting the fiscal understanding and abandoning the commitment to timely austerity measures, would seem to carry with it great risk. But is François Hollande really as great a political and economic risk to the eurozone as many would have us believe?

The Flight to Prime
Property investors could be forgiven for being worried about his wish to revisit the agreements. A new round of uncertainty will boost the present emphasis on prime properties in recognised 'safe havens'. London is one such haven and has certainly benefitted from eurozone uncertainty with substantial inward flows of capital over the course of the last few years. West End office yields have been pushed down to 4% or lower on many transactions. Wealth preservation strategies are driving these flows and property return is often seen as secondary to market security, transparency and liquidity. Oddly enough, Paris - despite its most recent role as the epicentre of eurozone uncertainty - has benefitted too with positive inflows of international capital into prime segments of the property market.

Transaction Volumes
During Q4 2011 and Q1 2012, the eurozone flirted with calamity, but commercial property investment increased steadily in Paris. The annual investment volume average grew by 21% in this period. In contrast, volumes in London fell by 8.7%. Is London less secure? Does pricing have something to do with the trend? Paris does offer an additional 50 basis points of yield. Surely the increased risk of a euro-denominated asset is not fully priced into such a minimal differential?

Counter intuitively, there is ample evidence to suggest that investment into Paris is being driven by the very forces that would seem to undermine it.
A buoyant investment market in Paris is being driven in part by a general flight to prime by domestic investors, but it is also being driven by intense competition for ‘safe haven’ property across the channel in London. In London, there is a clear lack of supply of institutional grade product to meet the extraordinary demand.

Local UK institutions have been squeezed out by international institutions including among others, EMEA-based investment funds, sovereign wealth funds worldwide and North American pension funds. Their collective appetite cannot be satisfied in London, so Paris offers an alternative.

Paris investment in Q1 2012 has been driven by institutional demand which accounts for 88% of all deals by value. The demand comes from local French funds, German funds and other international funds with a local presence or with local partners. In London, the figure is 73% and most of this is foreign.
The evidence might suggest that as eurozone instability continues to express itself in more and more surprising ways, that property investors increasingly look for opportunities in the largest and most liquid international markets of Europe. Cities that ebb and flow with the tide of the international economy will continue to fare better than those that depend on their local regional economies and arguably, London and Paris are the two most internationally linked cities in Europe.

In light of the foregoing, it is tempting to conclude that the election of François Hollande can only result in further support for the Paris market, but possibly for all the wrong reasons. One certainty rises above the rest, that circumstances have placed Hollande in what is likely to be remembered in years to come as a heroic position. Irrespective of politics, investors are waiting to see what he delivers in terms of balancing much needed growth with much needed austerity in an economic union that requires much needed unity.

Dr Walter Boettcher
Head of Research, EMEA, Colliers International