Real estate market France

France stands as one of Europe's most dynamic property markets for investors, ranking third after the UK and Germany. Over the past decade, the average transaction volume has soared to approximately 35 billion euros. However, a staggering 70 percent of this volume is typically driven by domestic investors. “This dominance underscores the importance of a local presence in France”, says Etienne Marcot, Head of France at AM ALPHA. 

In any case, there is no way around Paris. The capital attracts significantly more investor capital than all other French cities combined. In this centralised country, around 80 percent of the capital invested in French commercial real estate usually flows into the greater Paris area, the Île de France. This is the heart of the Republic and also the heart of the French commercial real estate market. And this is where the highest prices and rents are realised. The markets in locations such as Lille, Lyon, Marseille, Nantes and Toulouse are significantly smaller but offer investors the opportunity to enter the market much more favourably than in the capital of love.

As the yield compression for property investments has long since ended and significantly higher net initial yields are being offered across the country again, the spread between OAT yields and average property yields is approaching 150 basis points for office and retail properties and 200 points for logistics properties. This makes property investments much more attractive again. Etienne Marcot is convinced that this will soon be reflected in a significant increase in transaction volumes. 'The financing landscape has stabilised,' he says, 'the cost of financing is gradually falling, and most of the value corrections for property have now been made.' If the European Central Bank begins to lower its key interest rates in the coming months, as expected, this will help to improve market sentiment significantly.

According to BNPPRE, prime yields for offices in the central business district of Paris stood at 4.25 percent in the first quarter of 2024. Gone are the days of early 2022, when prime yields at the cycle's peak were only around 2.70 percent. In the first quarter of 2023, they reached 3.15 percent again. Beyond the CBD, prime yields of 6.50 percent in La Défense or even 8.00 percent in the Outer Rim submarket are now possible again. In other cities, from Lille in the northeast to Toulouse in the southwest, yields range from 5.75 percent in Lyon to 6.80 percent in Bordeaux. 

AM ALPHA's Head of Asset Management in France, Gilles Chamignon, attributes the fact that prime rents for office space in Paris passed the 1,000 euros/sqm/year mark for the first time at the beginning of this year (only London is more expensive in Europe) to strong demand and a shortage of modern office space in attractive locations in Paris. 'Office take-up in the CBD of Paris increased by almost 15 percent compared to the first quarter of 2023,' explains Gilles Chamignon. 'Such figures indicate a stabilisation of the market. As in all European countries relevant to property investors, the market in France had been on a downward spiral due to the war in Ukraine, the ECB's sharp rise in key interest rates and the rapid increase in inflation rates.' However, there are now increasing signs that the bottom has been reached or passed. The price expectations of potential buyers and sellers are becoming more and more similar. Investors are advised not to wait too long to take advantage of the sharp price fall when entering the market. 

Investors remain cautious when it comes to retail properties. They are thus taking into account the trend towards online retail, where, according to the retail association Fevad, sales were 10.5 percent higher at the end of last year than at the end of 2022. In contrast, the French statistics office Insee recorded a 1.7 percent drop in the volume of goods sold in bricks-and-mortar retail in the same period. In addition, retail tenants must once again expect rents to rise much more sharply after the government of then Prime Minister Élisabeth Borne limited the cap on rent increases to 3.5 percent annually until the first quarter of 2024. With the state-imposed cap, the government wanted to protect the retail sector from an excessively high rent increase, which is generally indexed, in light of the sharp rise in the inflation rate in 2022.