2023 witnessed a level of real estate investment considerably lower than in previous years, with a total of €14 billion reported, compared to between €28-29 billion in 2020-2022. The dynamics within these figures indicate a preference for smaller transactions, suggesting a lower risk appetite, and a fall in international capital investment.
Historically, resilience and stability have characterised the French real estate sector, with a steady economy and robust legal protections among the reasons investors see France as an attractive investment opportunity. Despite global health, political, and economic crises causing significant disruption in recent years, macroeconomic projections for 2024 are cautiously optimistic, with continuing drops in inflation a key factor in supporting modest growth.
Changes to the pricing environment in some asset classes will be central in attracting increased investment, with the growth in rents set to stabilise and the valuations of some assets declining expected to appeal to investors looking to make acquisitions. However, the impact will not be equal across the country, with trends in urbanisation concentrating demand in certain areas and maintaining inflated prices.
Below we examine each of the primary asset classes individually:
Logistics & industrial
The logistics sector felt the initial impact of the energy crisis and subsequent price adjustments towards the end of 2022. While logistics transactions have resumed, the rise in rental values has slowed due to inflation and supply scarcity, with the market being driven by investors specialising in this class as ancillary costs, automation, and high-interest rates impact capital investment and growth.
There is an increase in demand for smaller, city-centric spaces (last-mile), while larger logistics assets are less appealing to tenants reluctant to commit to long-term leases. The primary challenge now lies in meeting recent legislation mandating all large roofs and car parks must feature solar canopies in the next 3-5 years, as the government targets a rapid acceleration in the country’s renewable energy development. This comes alongside compliance with the zero artificialisation nette (ZAN), which aims to limit the development of new assets on non-urbanised lands.
Retail
Shopping centres continue to bear a significant impact from the crisis, with very few assets being sold at discounted prices and a potential for distressed situations in 2024. Given the size of these assets, real estate investors are displaying a reluctance to invest in this class, especially considering the high charges for tenants and the overall fragility of retail businesses, particularly in the fashion sector.
Furthermore, the development of new shopping centres on the outskirts of cities and towns will be constrained by the ZAN regulation. Conversely, retail parks remain appealing but are predominantly acquired by established players. In urban areas, the status of high-end retail varies based on location and type, with institutional investors' interest being largely overtaken by private investors and family offices.
Residential
The residential sector has demonstrated resilience, with individual unitary transactions experiencing a notable slowdown, while institutional investors show a strong appetite for this asset class. However, in the build-to-rent (BTR) segment, capped rents in certain cities are keeping yields relatively low.
The high-luxury residential sub-sector remains unaffected by the crisis, particularly in cities and sought-after regions, such as those with a strong cultural significance or considerable tourism appeal as foreign investors target exclusive properties in prime locations.
Co-living projects are also beginning to emerge, again in urban areas where supply is short, demand is high, and rents are elevated as a result. However, despite a general shortage of supply, economic challenges impacting developers have led to a significant decrease in the number of building permit filings.
Offices
The office market can be categorised into prime locations and others. While there haven't been significant transactions in prime locations, the appetite for these spaces remains, albeit with yields now at 4% compared to 3% in recent years. The attractiveness of this market is driven by rental dynamics in prime locations such as Paris and regional hubs like Lyon, Bordeaux and Nantes that can offer good transport links and cultural activities.
Conversely, suburban and rural locations have felt a greater impact, leading to assets being withdrawn from the market or sold at discounted values, presenting new opportunities for value-added investors. Anticipated refinancing challenges in 2024 may also create distressed situations in the office sector. The primary challenge ahead lies in ensuring that existing office buildings comply with new ESG regulations.
Hospitality
Following the recent Rugby World Cup and with the upcoming Olympics, the hospitality sector is showing signs of resilience. Occupancy rates have rebounded to pre-Covid levels, although variations may exist across different hotel categories and locations. These levels have been achieved despite the absence of a significant portion of Asian tourists.
Investors are showing interest in four and five-star hotels in the Paris area and regions, although a few large Parisian hotels have been on the market for several months without attracting buyers, primarily due to size and investment volume considerations. Mid-range hotel chains are proving to be a dynamic asset class, with investors and operators collaborating in portfolio deals.
