France: Europe’s Thriving Real Estate Market for Investors

Discover why France ranks third in Europe's real estate markets, with soaring transaction volumes and a strong domestic investor presence.

France has emerged as a veritable powerhouse within Europe's real estate markets, securing its position as the third most attractive destination for investors, trailing only behind the UK and Germany. Over the past decade, the average transaction volume has skyrocketed to an impressive 35 billion euros. Yet, it is noteworthy that a staggering 70 percent of this volume is predominantly fueled by domestic investors.

In the realm of French real estate, one cannot overlook the undeniable gravitational pull of Paris. The capital city garners a disproportionately large share of investor capital, eclipsing all other French cities combined. In this centralized nation, approximately 80 percent of the capital allocated to French commercial real estate gravitates towards the greater Paris area, known as Île de France. This region serves as the pulsating heart of the Republic and, by extension, the epicenter of the French commercial real estate market, where one can witness the highest prices and rents.

Conversely, markets in cities such as Lille, Lyon, Marseille, Nantes, and Toulouse, while significantly smaller, present investors with a more accessible entry point compared to the City of Light, often dubbed the capital of love.

However, the office property sector is currently navigating turbulent waters. For many years, offices were the darlings of investors, constituting around 60 percent of transaction volumes. Alas, the onset of the coronavirus pandemic has altered this landscape dramatically, ushering in a widespread shift towards remote work. According to data from BNP Paribas Real Estate (BNPPRE), a mere €705 million was invested in office buildings during the first quarter of 2024, representing only a quarter of the total quarterly volume of €2.8 billion. This unusually low figure stands in stark contrast to the ten-year average of €4.9 billion for the same period, as reported by BNPPRE. Contributing to this decline are the lingering effects of attractive interest rates on French government bonds (Obligations assimilables du Trésor, OAT), which had temporarily surged above 3 percent for ten-year OATs in 2023. Currently, interest rates have stabilized below the 3 percent threshold, with the Banque de France offering a rate of 2.82 percent at the end of March 2024.

Yet, as the yield spread between government bonds and property investments widens, real estate is regaining its allure. The era of yield compression has come to an end, and significantly higher net initial yields are once again being offered nationwide. The spread between OAT yields and average property yields is nearing 150 basis points for office and retail properties, and an impressive 200 basis points for logistics properties, making real estate investments increasingly appealing.

In the central business district of Paris, prime office yields stood at 4.25 percent in the first quarter of 2024, a far cry from the cycle's peak in early 2022, when yields plummeted to around 2.70 percent. By the first quarter of 2023, yields had rebounded to 3.15 percent. Beyond the CBD, prime yields of 6.50 percent in La Défense and even 8.00 percent in the Outer Rim submarket are now attainable. In other cities, yields range from 5.75 percent in Lyon to 6.80 percent in Bordeaux.

Encouragingly, the rising demand for office space indicates a potential stabilization of the market. Gilles Chamignon, Head of Asset Management at AM ALPHA in France, attributes the recent surge in prime rents for office space in Paris—now surpassing the €1,000/sqm/year mark—to robust demand and a scarcity of modern office spaces in desirable locations. However, signs are emerging that the market may have reached or surpassed its nadir, as the price expectations of potential buyers and sellers converge. Investors are advised to act swiftly to capitalize on the current price dip.

Meanwhile, the retail sector remains a cautious arena for investors. The trend towards online retail continues to gain momentum, with sales reportedly 10.5 percent higher at the end of last year compared to the previous year, according to the retail association Fevad. In stark contrast, the French statistics office Insee recorded a 1.7 percent decline in the volume of goods sold in traditional retail during the same timeframe. Furthermore, retail tenants should brace themselves for a resurgence in rent increases, as the government, under then Prime Minister Élisabeth Borne, has lifted the cap on rent hikes that had been limited to 3.5 percent annually until the first quarter of 2024. This cap was initially implemented to shield the retail sector from exorbitant rent increases amid the inflation surge of 2022.

In summary, while France's property market presents a tapestry of opportunities and challenges, the evolving landscape demands astute navigation by investors seeking to make their mark in this dynamic environment.