The end of 2019 brought a marked slowdown in the French economy. Was this a temporary wobble, an artefact of shifting market conditions, or a long-term readjustment for France, which has shown such remarkable resilience compared to other major economies? For a whole host of reasons, the former seems more likely. France still has one ace up its sleeve in this volatile and uncertain international climate: reliability.
It was a distinctly chilly wind that blew through the French economy in the fourth quarter of 2019. After ticking over at a growth rate of 0.3–0.4% since the start of the year, GDP dipped slightly in Q4, down 0.1% on Q3. This was a disappointing result, and one that economists failed to predict. There were various contextual factors behind this unwelcome surprise, starting with the protracted strike in protest against France’s proposed pensions reform. A substantial proportion of railway, local transport and port workers took part in the strike, particularly affecting public and freight transport. The lower rate of growth in household spending observed during the crucial Christmas period (up just 0.2% in Q4) can largely be attributed to strike activity, as can the sluggish growth in business investment (up 0.3%).
Overall, this rocky spell dragged France’s economic growth for 2019 down to 1.2%. This is lower than anticipated — forecasts from various respected sources had led us to expect a growth rate of between 1.3% and 1.4%. It puts France broadly back on a level with the United Kingdom or with the Eurozone as a whole. This means that the dent in international trade caused by tensions between the US and China has been less of an issue for the French economy, which remains primarily driven by domestic demand, whether in the form of household consumption or corporate investment.
Altogether, these factors have led forecasters to expect growth of between 1.1% and 1.3% for France in 2020. This is perfectly consistent with the country’s 2019 performance: slow, steady, free of major upsets... and ultimately rather reassuring.
The investment market in France
40,000 million in the sun
For the first time in its history, the French market has recorded over €40,000 million of investment in commercial real estate. It seems that 2019 will be remembered as a landmark year in this market’s development — the one that took it to a whole new level. Paris and its wider metropolitan area, which account for two thirds of the national investment volume, played a critical role in setting up the market for a record-breaking streak in 2019. This was the year that Paris finally outplayed London, stealing its mantle as Europe’s foremost investment destination. Still, this momentous feat should not distract us from some equally impressive performances among France’s regional capitals. There are some real opportunities to be had beyond Paris itself.
Investment volumes: Fast & Furious
Like a vast ocean liner that has hit cruising speed, the French market did not waver from its course or temper its pace at any point in 2019. In the final quarter of the year alone, it attracted an investment volume of more than €15,000 million — not so very long ago, that would have been regarded as a respectable annual performance.
By the end of the year, the market had posted a total investment volume in excess of €40,000 million, setting a brand-new record. The previous record, just one year old, took the French market over the €35,000-million mark for the first time. At the close of 2019, investment was up 16% y-o-y. Even more remarkably, it had overshot the ten-year average by a colossal 74%.
The buoyancy of the French market is especially striking given the heightened state of uncertainty in the global economic climate. While both France and Europe as a whole saw a marked step-up in activity in Q4 2019, compensating for a sluggish first nine months, Europe’s overall investment volume was more or less static with respect to the previous year, coming in at a little over €265,000 million. France was the only one of the three largest European markets to post investment growth of over 10%. As a result, the French market’s third-place position is looking more and more secure as it edges closer to its greatest rivals: Germany, on a total investment volume of €71,000 million (up 9%), and the UK, on €61,000 million (down 18%).
Paris, without question, takes the crown: the French capital is now Europe’s premier investment destination, a pivotal feat that perfectly encapsulates the ebullience of the national market — and a new first for the city of light. Investors poured €27,700 million into the city in 2019 (up 14% y-o-y), allowing Paris to close the year well ahead of London (€22,100 million, down 28%). Berlin took third place, but despite a stunning 55% leap, on €11,900 million it ended the year trailing far behind the top two.
Origin of funds invested: The world is not enough
If the French market has succeeded in consolidating its position since summer 2019, this is largely due to the combined effects of new growth drivers that added further impetus to an already upbeat market.
The biggest change was the re-entry of domestic investors. Since mid-2019, it was clear that there was something of a resurgence happening, as record sums were poured into short-term assets and SCIPIs (real estate investment trusts) reported a bumper year (up 68% on 2018, with €8,600 million invested over the course of 2019). This revival became all the clearer over the second half of the year. After taking a hit in the first two quarters and seeing their market share diluted in a torrent of international mega-deals, French investors made a comeback, ending the year on a reclaimed majority with 52% of the national investment volume. It’s a big step down from the 57% recorded a year earlier, but a respectable advance on the end of Q2, when French investors made up just 44% of the market. Why this sudden rebound? There were two factors at play here: a more assertive, competitive stance among French investors, and a heightened interest in alternative properties at the expense of Paris’s traditional office base. The second half of 2019 brought the completion of some major acquisitions involving domestic investors, such as Cargo’s national portfolio of 22 logistics platforms, the 57,800 sqm created by the #V2 and #V3 developments now taking shape to the north of the city in Saint-Ouen, Tango’s portfolio in Lyon (including almost 53,000 sqm of commercial space) and 66,000 sqm in the To Lyon tower. Returning to Paris, the market was also given a boost by mounting interest in shopping centres and arcades, with one insurance fund acquiring a stake in both the Italie 2 centre and Passage du Havre.
This growth driver has injected new energy into a market already riding high on international interest in French real estate — something that’s showing no signs of drying up, although it is becoming less exclusive. Despite the economic slowdown affecting every part of the globe, major international investors (particularly institutional investors) are still sitting on substantial sums, just waiting for the right opportunity. Those are not always easy to find, and based on an analysis of the risk-return trade-off there is often a good case for caution. The current level of political and economic instability is a weighty consideration, as is the volatile money market. Amid these concerns, real estate — and particularly French real estate — starts to look like a very tempting opportunity. The appeal of the French property market is largely attributable to its financial resilience, the quality and strength of its lettings market and its high levels of institutional stability. This latter point counts for a great deal, as it allows a clear view ahead to the medium term — a rarity in the current climate. France has also benefited from the fall of the euro against most other world currencies, giving French real estate a competitive advantage with the promise of a potential upside.
As a result of all these considerations, international investors accounted for 48% of France’s total investment volume at the close of 2019, compared with 43% a year earlier. This level of international investment had not been seen since the financial crisis of 2007/2008.