OUTLOOK PARIS: International investors shy away from prime French market

The French real estate market is losing its shine for international investors, PropertyEU’s Outlook Investment Briefing at the Paris headquarters of law firm Taylor Wessing heard last week.

France is not on the map at the moment for a lot of international investors from Asia, the Middle East and even Europe, according to Didier Unglik, chairman of investment manager Etoile Properties. 'When they come to Paris, they see that it is so expensive and that the competition (from local players) is so heavy and they can’t explain it when they look at the economic fundamentals and see that key reforms have not been made. We've taken Asian investors here, they like it, but they don't want to buy anything.'

Germany is currently a far more popular destination for international investors, he added. ‘They all want to go there. The German market is more diversified. You can find big to small buildings and there is also variety on the yield side, which may differ from big to smaller cities. The economic fundamentals are strong…Germany offers only pluses and very few minuses.’

The Netherlands is also on their agenda, Unglik continued. 'They see that reforms have been undertaken in the Netherlands. It's a small market, but they see some rationale that they don't see in France.'

A disconnect between prime yields and market fundamentals is becoming increasingly visible in the Paris office market, the panellists noted. ‘There is a disconnect in Paris,' agreed Philip la Pierre, head of investment management Europe at Union Investment. 'Why pay a higher price for insecure income? Paris may be the biggest and strongest market in France, but it’s a very corporate market with a lot of big companies. It doesn’t have more mid-sized companies like other countries and there’s a higher risk in Paris of income falling than London or Munich. On the income side, you have to deal (more frequently) with re-leasing and prolongation costs. In the UK, a medium-term lease contract generally means stable solid income that is moving up.’

In the current market, investors have to 'dig deep' to find the opportunities, La Pierre said. 'The market will be equity rich for some time and equity is more patient than debt. But there's plenty to do going forward.’

Union Investment looks a the full spectrum of real estate segments including alternatives like hotels, he continued. ‘If you invest €1 to 2 bn a year, you have to. We have a long track record in hotels but you need relationships to get into that segment. This business is more relationship-driven (than many others). Four years ago we set up a partnership with Motel One. We have been buying hotels in B locations for the past 15 years and we have operated a hotel fund for the last three years with hotels in cities like Osnabruck, Bremen and many other cities that many people may not have heard of. You would be surprised to see how many cities there are in Germany with 150,000 inhabitants.’

The Hamburg-based investor also invests in logistics, but the market in the company's home country appears to be getting overheated, La Pierre intimated. ‘It’s difficult to make sense of the numbers. We just lost a bidding process where bids came in at a multiple of 18.5 - or a 5% yield - just for some land and a shed. That’s a worrying trend. We have €800 mln of logistics assets and would like to expand, but it’s difficult. The competition is immense and the field is very crowded. It feels like you’re in a metro in Paris at 8 am in morning, but the train is not moving and it’s dark!’

With equity as cheap as it is at present, the situation is not likely to change for the foreseeable future, he added. ‘Prices seem a bit over the top. A 3% yield may now sound good, but eight years ago it would have sounded ludicrous. That’s one thing I find worrying. Spreads (for real estate) are at a historic high in relation to bonds, but that’s also due to malfunctioning markets on the government side. Some investors really don’t understand the real estate market so silly things will happen.’

Development
The way to work in logistics, La Pierre said, is to partner with a specialist, hook up with an internet company and do a joint venture. Another option Union Investment is looking at to deploy capital is via forward-funding of new developments. ‘We see value in taking a higher risk and going up the risk curve. We step in, not as financier but as an asset manager. That is one of our unique selling points. The developer builds and we have the skills in house to do the leasing and provide asset management. That’s expertise that you need for this, not just cash on the table. That is something we want to expand in certain markets.’

La Pierre sees opportunities for office development in Ireland, in particular Dublin. ‘It’s a small market but supply is limited. Dublin remains the tech entry point for the US. Growth will run via Dublin. They have cornered the big brains in Europe.’ Other locations that Union Investment likes are smaller German university cities. 'They are here to stay.’

Development is more of a story in the current market, agreed Marcus Cieleback, head of research at Patrizia Immobilien. ‘You have to look at the opportunities. At the end, the question is: do you trust the market and the partner you are operating with? Development means a different approach to investment. We only do it where we have people on the ground and where we have to build the asset because it doesn’t yet exist. Like the private rental system in the UK. Institutional investors don't find this market efficient.'

In terms of opportunities elsewhere in Europe, Union Investment continues to monitor Warsaw, La Pierre said. ‘But,’ he added, ‘the office vacancy rate is not going to reduce going forward. We like Wroclaw and Krakow though, these are great university cities with a lot of human capital. Poland has a very good long-term prospect for growth.’