The French real estate market is approaching historically high pricing levels, but the peak could last some time yet, PropertyEU's Outlook Briefing in Paris heard last week.

The French real estate market is approaching historically high pricing levels, but the peak could last some time yet, PropertyEU's Outlook Briefing in Paris heard last week.

'It feels like we are close to the peak, but the peak is being pushed back every 6 to 12 months and possibly even another two years,’ noted Renaud Jézéquel, general manager of Helaba's French business.

The answer to where the market is in the current cycle differs according to product class and type of investment, he added. ‘Investors need to ask themselves which piece of the pie do they want. The answer will also depend on whether the asset is core or value-add, and whether it is an existing asset or new development.’

Another key issue for investors is their time horizon, he added. 'A lot of opportunity funds are now taking a wait-and-see attitude which suggests that the market may be close to the brink. Maybe they are hoping for a value decline and a better time to buy as many of them are now selling. At the same time, the market is being flooded by all this cash and investors are putting it into real estate, infrastructure or lending.’

Investors that take a long-term view on real estate investment will see that France is great, he continued. Moreover, the European market continues to remain attractive for international, particularly US investors. ‘About 55% of the French market is domestic, but the rest is international, dominated by US and to a lesser extent Asian investors. Going forward, the dollar will increase in value if interest rates rise. The US is experiencing a phase of economic growth which we won’t have for a while still. I think we are going to see more of the Americans coming in.’

Good risk-adjusted returns
Stephen Miles, managing director, EMEA, Capital Markets, CBRE, UK, sees core yields in France continuing to fall in the near term due to the sheer weight of capital and the ongoing price differential between CBD office yields and government bonds. ‘If you look at the investable landscape, it still offers good risk-adjusted returns. Moreover, the investable real estate universe is constantly moving as assets move through the cycle.'

Miles noted that there has been a small shift in who’s driving the market but not a major change in sentiment. 'I don’t know of any institutional investors who are dropping their allocations to real estate. A few sovereign wealth funds slowed up a bit this year, but that is linked to the fact that they are more reliant on commodities at their base and the crisis that we have seen since the summer. But there is still that typology of investors looking for security and safety. That’s going to drive core yields down in the near term.’

Benjamin Cartier-Bresson, head of Berlin-Hyp’s representative office in France, agreed that the market is approaching historically high prices, but maintained that the peak could last for a couple of months yet. ‘It’s difficult to predict where the next shock will come from. But long-term players should be able to survive with a temporary drop in value of 10-20%. We would advise those of our clients that can’t absorb that to consider very carefully what they need to do to survive.’

Yield levels
Arguments that prime yields are at their long-term averages fail to take account of the peculiarities of the current market, CBRE's Miles added. ‘Some investors are more focussed on financial financing. Yields are constantly shifting down but that is being facilitated by financing prices so it doesn’t work to look at the 20-year average. It’s possible to get good cash on cash returns with lower actual property returns and we’re still a couple of steps away from rising interest rates. First we will see some more QE expansion, some retraction and then interest rate rises.’

While Miles sees room for prime yields to come in by as much as 50 to 100 bps in some markets, the same is not true for secondary markets, he said. ‘Secondary yields may remain stubbornly high for some time longer. There are still some risks out there with regard to occupier situations. We won’t see that changing any time soon.’

Cartier-Bresson endorsed that view. ‘We may be heading for a new era of higher interest rates in the US but interest rates will most likely remain moderate. In Europe on the other hand they will remain low. They will not be a main driver for the investment climate for the next months at least.’