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Covid-19
What is the outlook for the
French investment market?
The French investment market
Q1 2020
Knightfrank.com/research
2
COVID-19
WHAT IS T HE OUT LOOK FOR T HE
FR E NC H INV E S T M E NT M A R KE T ?
FRENCH INVESTMENT MARKET l Q1 2020
At the beginning of 2020, the excellent momentum of the French
investment market seemed set to continue despite the economic
slowdown and geopolitical tensions. After a record year in 2019
(37.6 billion euros invested), forecasts were for volumes close to 30 billion
euros, once again well above the ten-year average (23.2 billion).
In the 1st quarter 2020, the trend remained very positive, with a
significant 28% increase in investment volumes compared to the
1st quarter 2019. However, the spread of the coronavirus has changed the
game. Consequently, the implementation of severe restrictions will
necessarily weigh on activity in 2020, even if it is very difficult to estimate
the extent of the slowdown until we know how long the lockdown period
will last.
Covid-19 could also have consequences in the longer term, which
Knight Frank analyses in this first update since the outbreak of the
health crisis.
3
€6.2 billion was invested in the French
commercial property market in Q1 2020,
a 28% increase year-on-year and 93%
higher than the ten-year average. This is
the third best quarter on record after
2006 and 2007. This very good result was
a continuation of an exceptional year-end
2019. €15.6 billion was invested in Q4,
resulting in the French market breaking its
record for 2019 as a whole. The sums
committed in Q1 2020 could have been
even higher if the implementation of
restrictive measures had not severely
curbed activity as of mid-March.
Before the outbreak of the health crisis,
activity was more or less the same as last
year. Large transactions continued to play
a leading role, with 16 transactions in
excess of 100 million euros totalling
€3.9 billion (63% of total volumes
invested).
13 of these large transactions were
completed in the Greater Paris Region.
All volume categories taken together,
€4.4 billion were invested in Q12020 in
the Greater Paris Region, an increase of
41% year-on-year.
In Q1 2020, the trend was also positive in
the French office market. With €4.3
billion, the increase was 35% year-on-
year and 100% compared to the ten-
year average; once again, large
transactions played a decisive role, with
13 transactions in excess of 100 million
euros accounting for 64% of the total
amount invested in offices in France.
Several of these large transactions
were undertaken in the capital,
including the acquisitions of 14 rue
Bergère by LIM and 50 rue d'Anjou by
Aviva Investors. All amount categories
taken together, nearly 2 billion euros were
invested in offices in inner Paris, a sharp
111% increase compared to Q4 2019.
T HE FR E NC H INV E S T M E NT
M A R KE T
RE VIE W OF 1S T QUA RT E R 2020
FRENCH INVESTMENT MARKET l Q1 2020
In the Western Crescent, activity held up
well, even though 40% of the volumes
invested in this sector in Q1 2020
(approximately €1 billion) were generated
by one large transaction: the sale of
Cap Gemini's new offices ("Aquarel"),
inaugurated last year in Issy-les-
Moulineaux. In the Inner Suburbs, a few
transactions also boosted volumes, such
as the sale by Gecina to Primonial Reim of
"Valmy" in Montreuil for more than 200
million euros. Following an outstanding
year in 2019 – the second best in history
after 2007 – the La Défense market
meanwhile slowed down. However,
several major transactions were well
advanced there before the outbreak of the
health crisis. Outside of the Greater
Paris Region, activity was most
dynamic in Lyon, with more than
€300 million invested in offices and a
number of large transactions, including the
acquisition by Aviva Investors of
"Lugdunum" and the sale of Cegid's
headquarters to Kanam.
Source: Knight Frank /*Offices, retail, industrial.
Breakdown of French investment
volumes, by asset type
(as at Q1 2020, as a %)
French investment volumes, all asset categories*
In millions of euros
Source: Knight Frank
4
With more than €1.3 billion invested
since January, the industrial real estate
market also began 2020 on a strong
footing having set a new record in 2019.
This volume, up sharply by 68% year-
on-year, accounts for 22% of the total
sums invested in France, all types of
assets combined. Furthermore, it is
largely comprised of logistics asset
transactions, most of which were sold in
the form of portfolios (sale of the “Hub &
Flow” portfolio to Ivanhoe Cambridge,
acquisition by Patrizia of a pan-
European portfolio, etc.). Investors'
enthusiasm for logistics also translates
into increased risk-taking, as illustrated
by Invesco's acquisition of two
warehouses to be developed
speculatively near Orleans and Reims.
Following a good year in 2019, the retail
market got off to a more timid start, with
this asset class posting a sharp 33%
year-on-year decrease. Retail
investment volumes were significantly
boosted by Mata Capital's acquisition
of the “CIFA Fashion Business Centre”
in Aubervilliers, Europe's largest
ready-to-wear wholesale centre.
FRENCH INVESTMENT MARKET l Q1 2020
Investment volumes in industrial property in France
In millions of euros
Investment volumes in retail in
France
In millions of euros
French industrial investment volumes
Share of industrial
French retail
investment volumes
Share of retail
(%)
Source: Knight Frank
Source : Knight Frank
Examples of significant transactions in Q1 2020
ASSET TYPE SELLER BUYER AREA (SQ M)
Mercury Portfolio, France Logistics GreenOak Patrizia -
14 rue Bergère, Paris 9 Offices BNP Paribas LaSalle Investment Management 33,000
Aquarel, Issy-les-Moulineaux Offices AXA DTZ Investors 33,500
Hub & Flow Portfolio Logistics Carlyle Ivanhoé Cambridge -
CIFA Fashion Center, Aubervilliers Retail Eurazeo Mata Capital 40,000
Le Valmy, Montreuil Offices Gecina Primonial Reim 28,000
50 rue d’Anjou, Paris 8 Offices Crédit du Nord Aviva Investors 10,600
79-81 boulevard Haussmann, Paris 8 Offices Groupe Roullier Balzac Reim 5,700
Lugdunum, Lyon Offices Unofi Aviva Investors 21,200
22-32 rue de Clignancourt, Paris 18 Offices BNP Paribas Vinci Immobilier 11,000
Other significant retail transactions
drove activity, including the sale of five
Casino supermarkets to Ascensio for
€85 million, and the purchase by a
private individual of 56 avenue
Montaigne, a mixed-use asset
comprising two luxury boutiques.This
transaction accounted for 45% of
high street investment volumes,
which were down 11% year-on-year.
Finally, the shopping centre market
remained virtually flat, even though the
beginning of the year was marked by a
major event: the formation of a
consortium between Crédit Agricole
Assurances and La Française to
acquire shares in a joint venture
involving five shopping centres owned
by Unibail-Rodamco-Westfield.
Q1 2020
5
FOC US ON…
COVID- 19 A ND A S IA’S
INV E S T M E NT M A R KE T
FRENCH INVESTMENT MARKET l Q1 2020
Since the Asian continent was hit very
early on by the spread of Covid-19, with
the first confirmed cases of infection
appearing as early as November 2019, it
is already possible to measure the effects
on the real estate market. Indeed, the
volumes invested in commercial real
estate in the Asia-Pacific zone fell
sharply by 59% year-on-year in the first
quarter of 2020, totalling US$18.1 billion
compared to US$44.2 billion for the same
period in 2019. While the downturn was
contained in South Korea (-10%), a
country that has so far managed to
control the pandemic, activity fell sharply
in China (-72%) and Hong Kong (-81%),
whose market was hit by both the health
crisis and political unrest.
Will the Asian market soon recover from
the health crisis? Over the past few
weeks, the first signs of recovery have
indeed been seen. In China, whose
economy was virtually shut down in
February, manufacturing production has
resumed, while some hard-hit sectors,
such as hotels and tourism, are slowly
picking up.
However, as the threat of a second wave
emerges, some restrictions have been
kept in place, or in some cases re-
established, and border controls have
been tightened to prevent the entry of
new cases. Japan has resolved to declare
a state of emergency in the seven
prefectures which account for 44% of its
population, while Singapore has just
initiated a one-month lockdown as it deals
with a second wave of infections.
Although caution is still called for in Asia,
uncertainty is at its highest level in other
parts of the world. Europe and the United
States accounted for more than 75% of
the total number of officially recorded
cases as of 8th April 2020 (compared to
only 5% for China), which explains the
extension of drastic restrictions that will
weigh heavily on their economies. This
slump will inevitably affect the
performance of the Asian economy. While
the WTO recently indicated that world trade
could fall by between 13% and 32% in 2020,
forecasters agree that China's GDP will
contract significantly, growing by no more
than 1-2% for the current year after a 6.1%
increase in 2019.
The real estate investment market will
inevitably suffer from the economic
downturn, although some market
sectors will recover faster after the
crisis. This is the case for the residential
market, which has already seen a slight
recovery. For example, the daily number
of sales in China's 30 largest cities at the
end of March returned to its early
January level, and was even slightly
above the December 2019 average by
4%. The recovery is slower in the
commercial real estate market. Across all
countries, property sales are still
constrained by ongoing restrictive
measures, and investors are giving
priority to managing their existing
assets to reduce the risk of rental
vacancies and maintain the value of their
properties. This is especially the case for
Korean investors, who had notably driven
the French market in 2019, buying
€3.4 billion worth of assets in the Paris
region, and who, despite some significant
transactions (the "Tour des Finances" in
Brussels, the OP Financial headquarters
in Helsinki, etc.), have been much more
restrained since the beginning of 2020
outside their home market.
6
%
CHANGE IN INVESTMENT VOLUMES IN THE ASIA-PACIFIC REGION Q1 2020 / Q1 2019
Offices, retail, industrial and hotels, as a %
FRENCH INVESTMENT MARKET l Q1 2020
APAC
SINGAPORE
HONG KONG
SOUTH
KOREA
CHINA
-81%
-81%
-10%
-72%
-59%
TOTAL
ASIA-PACIFIC
$18.06 billion
In spite of this, some observers are
hoping for a fairly rapid recovery of activity
in the commercial real estate market, as
was the case in the early 2000s in China,
Japan and Singapore once the SARS
epidemic had been contained. At the
beginning of 2020, investors' appetite
remains strong, and capital to be invested
in Asia, which today totals nearly US$40
billion, is well above the level that existed
before the 2008 financial crisis (US$5
billion).
In this context, core assets will be the
main target of investors as they are
traditionally more resilient to economic
shocks. In terms of asset classes, a
premium will be paid in particular in
China to logistics warehouses and data
centres, two market segments that were
already booming before the health crisis
and were boosted by the lockdown period
imposed on the population.
In the office sector, demand will focus
on service sector assets in the largest
cities, particularly those that were the
least affected by the health crisis, such as
Singapore and, in China, Beijing and
Shanghai, even though rental activity is
still constrained by companies’ lack of
visibility and the continuation of certain
restrictive measures. However, the
recovery could be facilitated by a
readjustment in the balance of power
between tenants and landlords, with the
latter being more inclined to revise their
rents downwards.
The magnitude of the expected correction
in the hotel and shopping centre segment
is much greater. Here, indicators remain
in the red and the recovery is not yet
perceptible. However, opportunistic
investors are already on the lookout for
opportunities due to the large price drops
that have been forecast.
Source: Knight Frank
7
Can we learn from this for the future?
Nothing is less certain. Firstly, because
the situation will remain very unclear until
we have a clearer picture of the
consequences of Covid-19 on the world
economy and on the rental markets and,
secondly, because this is a health crisis and
not a financial crisis.
What usually takes months
or quarters to happen in a
recession is happening in a
matter of weeks.
Michelle Meyer, Chief US economics
at Bank America Merrill Lynch
Indeed, the efforts made since the end of
the 2000s have helped to strengthen the
international financial system, which,
together with the huge and unprecedented
support measures announced by
governments and central banks, could help
to cushion the shock of the pandemic.
WHAT IS T HE OUT LOOK FOR
T HE FR E NC H INV E S T M E NT
M A R KE T ?
Others that are sufficiently advanced will be
finalised in the second quarter. The first half of
the year, nevertheless, is likely to be the
weakest in recent years. It should be
remembered that volumes invested in the
first half of the year have averaged
€10.3 billion over the last five years,
compared with €6.2 billion since the
beginning of 2020.
The magnitude of previous crises can,
however, give some indication. While
the stock market crash of 2001-2002
resulted in a fairly limited decrease in the
sums invested in France (-20% between
2001 and 2003), the financial crisis of
2008 was quite different, with volumes
falling fourfold in two years (from €28.5
billion in 2007 to €7.1 billion in 2009). The
downturn was all the more severe as
activity had previously set a new historical
record after four years of consecutive
increases. The Covid-19 crisis also comes
at a high point: since 2013, the sums
invested have been constantly increasing,
rising by 141% to €37.6 billion in 2019.
Before the outbreak of the health crisis,
foreign investors were directly contributing
to the excellent dynamics of the French
market. In 2019, they accounted for 44% of
the sums invested in France, a share that
rose to 58% in Q1 2020. Will the
presence of foreign investors still be as
important in the coming months? The
first indications are fairly positive. Some are
completing transactions initiated before the
start of the health crisis. Others are already
thinking about the future, even if a wait-
and-see attitude will prevail as long as
market conditions remain uncertain.
French investors will be just as cautious,
which will inevitably weigh on the level of
investment volumes in 2020. Other, more
"practical" constraints will also limit activity
(inability to visit properties, slowing down of
urban planning procedures, etc.) even if
technological advances (remote meetings,
electronic signatures, digitisation of sales
deeds) partly make it possible to
circumvent social distancing measures.
Moreover, transactional activity did not
quite come to a complete stop with the
health crisis. Several transactions have
thus been recorded since mid-March.
FRENCH INVESTMENT MARKET l Q1 2020
Investment volumes in France, breakdown by nationality
Source: Knight Frank
Investment volumes in France,
all asset categories
In millions of euros
Source: Knight Frank
1st half
2nd half
Q12020
€40,000
€35,000
€30,000
€25,000
€20,000
€15,000
€10,000
€5,000
€-
88
Nevertheless, several questions remain.
Since the Minister of the Economy and
Finance recently urged economic players,
and in particular banks, to "play the
solidarity game" by helping to safeguard
businesses and jobs, could this shift in the
banking system in favour of the real
economy limit the sums allocated to the
financing of commercial real estate?
Inflows will also have to be carefully
analysed, as some French people will most
likely see their savings capacity eroded by
the economic slowdown. In 2019, inflows
had reached record highs, with a 20% year-
on-year increase in life insurance and a
57% year-on year increase in SCPI/OPCIs.
The latter had also increased their
investments in the French property market,
with a 24% share of investment volumes in
France (19% in 2018), albeit down to 11%
since the beginning of 2020. Although the
figure for SCPI/OPCI inflows in Q1 2020 is
not yet known, the figure for life insurance,
on the other hand, shows a first tendency,
with a 58% year-on-year decrease at the
end of February. Could this drop, which is
related to the decrease in yields, be
exacerbated by the health crisis?
FRENCH INVESTMENT MARKET l Q1 2020
Investment volumes in France, by
type of buyer, as a %
What will become of SCPI/OPCIs, whose
appeal could be diminished by the high
level of uncertainty surrounding the
economy and the performance of the real
estate sector?
In spite of everything, real estate should
still keep a prominent place in investors'
investment strategies. Indeed, the
French market is entering this crisis
with better fundamentals than in
previous crises. The spread, which
clearly favoured the real estate sector
before the outbreak of the health crisis (a
spread of 275 bps with the 10-year OAT
rate at the beginning of 2020 compared to
215 bps in 2008) should thus remain
positive due to the support measures
taken by the State and the ECB. As for
the equity markets, they are very
turbulent. Moreover, LTV levels are
significantly lower than those seen before
the 2008 financial crisis. Finally, the good
health of the rental markets, with
historically low vacancy rates and peak
rental values in certain office hubs, gives
reason to hope for a less severe crisis.
Investors will judge the various market
sectors by their resilience. They will
therefore give preference to core
assets in order to secure their rental
streams against a background of rising
business failures and rising vacancy
rates.
24%
11%
19%
26%
37%
41%
7%
3%
4%
8%
3%
6%
11%
2019 1T 2020
Autres Fonds souverains
Privés / Family Office Foncières
Fonds Assureurs
SCPI / OPCI
Others
Private / Family Office
Funds
SCPI /OPCI
Sovereign funds
Property companies
Insurance companies
Source: Knight Frank
Change in prime yields
Source : Knight Frank
2.75%
2.75%
4.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1T2020
Bureaux (Paris QCA)
Rues commerçantes (Paris)
Logistique (Ile-de-France)
This will only accentuate a trend that
was already underway before the
outbreak of the health crisis, since the
acquisition of core assets accounted for
close to two-thirds of office investment
volumes in the Greater Paris Region in
2019 and as much as 75% in Q1 2020.
This increased market polarisation in
favour of core assets could mitigate the
rise in prime yields. Prior to the Covid-
19 crisis, prime yields were at a
historically low level of 2.75% for the
best office assets in the CBD, 100 basis
points below the level recorded before
the 2008 financial crisis. On the other
hand, the health crisis is likely to put
an end to the yield compression on
secondary assets or assets in need
of improvement, thereby restoring a
risk premium that had tended to be
eroded in recent years.
Investors' enthusiasm for logistics,
whose strategic role has been so
obvious since the beginning of the
lockdown period, should also increase,
while other asset types, directly and
heavily impacted by the health crisis
(shops, hotels, etc.) will be subject to
greater selectivity.
Q1 2020
Q12020
Offices (CBD)
High Street (Paris)
Logistics (Greater Paris Region)
9
FRENCH INVESTMENT MARKET l Q1 2020
But these transformations could run
deeper than a simple market shake-up.
Before Covid-19, several epidemics had
already marked the beginning of the 21st
century, such as SARS, H1N1 and Ebola,
and it is now clear that other scourges
could appear in the years to come. This
will lead investors and the entire real
estate industry to better assess the health
risk. In the office sector, for example,
buildings and workspaces will have to be
upgraded to ensure the safety of
employees in the event of a new crisis.
The Covid-19 crisis is also likely to
encourage investors to better integrate
other types of risk into their allocation
strategy that, like climate change,
could be a source of major upheaval.
Contacts
Vincent Bollaert
CEO France
+33 1 43 16 88 90 | vincent.bollaert@fr.knightfrank.com
Matthieu Garreaud
Co-Head of Capital Markets
+33 1 43 16 65 22 | matthieu.garreaud@fr.knightfrank.com
Antoine Grignon
Co-Head of Capital Markets
+33 1 43 16 88 70 | antoine.grignon@fr.knightfrank.com
David Bourla
Chief Economist & Head of Research
+33 1 43 16 55 75 | david.bourla@fr.knightfrank.com
© Knight Frank SNC 2020
Knight Frank's Research Department provides market analysis and strategic real estate consultancy
services to a wide range of international clients, both private, institutional and end-users.
Knight Frank’s reports are available on the KnightFrank.fr website.
The data used to produce this study comes from sources known to be reliable, such as INSEE, ORIE and
the Knight Frank tools for monitoring real estate markets.
Although great care has been taken in the preparation of this publication, Knight Frank cannot be held
responsible for any errors. Furthermore, since this is general market research, it does not reflect Knight
Frank's opinion on specific projects or properties. Reproduction of all or part of this publication is permitted,
provided that the source is acknowledged.
2019 Overview 2020 Outlook
Commercial real estate in France
Reports available at:
knightfrank.com/research
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Covid-19 - What is the outlook for the French investment market?

  • 1. Covid-19 What is the outlook for the French investment market? The French investment market Q1 2020 Knightfrank.com/research
  • 2. 2 COVID-19 WHAT IS T HE OUT LOOK FOR T HE FR E NC H INV E S T M E NT M A R KE T ? FRENCH INVESTMENT MARKET l Q1 2020 At the beginning of 2020, the excellent momentum of the French investment market seemed set to continue despite the economic slowdown and geopolitical tensions. After a record year in 2019 (37.6 billion euros invested), forecasts were for volumes close to 30 billion euros, once again well above the ten-year average (23.2 billion). In the 1st quarter 2020, the trend remained very positive, with a significant 28% increase in investment volumes compared to the 1st quarter 2019. However, the spread of the coronavirus has changed the game. Consequently, the implementation of severe restrictions will necessarily weigh on activity in 2020, even if it is very difficult to estimate the extent of the slowdown until we know how long the lockdown period will last. Covid-19 could also have consequences in the longer term, which Knight Frank analyses in this first update since the outbreak of the health crisis.
  • 3. 3 €6.2 billion was invested in the French commercial property market in Q1 2020, a 28% increase year-on-year and 93% higher than the ten-year average. This is the third best quarter on record after 2006 and 2007. This very good result was a continuation of an exceptional year-end 2019. €15.6 billion was invested in Q4, resulting in the French market breaking its record for 2019 as a whole. The sums committed in Q1 2020 could have been even higher if the implementation of restrictive measures had not severely curbed activity as of mid-March. Before the outbreak of the health crisis, activity was more or less the same as last year. Large transactions continued to play a leading role, with 16 transactions in excess of 100 million euros totalling €3.9 billion (63% of total volumes invested). 13 of these large transactions were completed in the Greater Paris Region. All volume categories taken together, €4.4 billion were invested in Q12020 in the Greater Paris Region, an increase of 41% year-on-year. In Q1 2020, the trend was also positive in the French office market. With €4.3 billion, the increase was 35% year-on- year and 100% compared to the ten- year average; once again, large transactions played a decisive role, with 13 transactions in excess of 100 million euros accounting for 64% of the total amount invested in offices in France. Several of these large transactions were undertaken in the capital, including the acquisitions of 14 rue Bergère by LIM and 50 rue d'Anjou by Aviva Investors. All amount categories taken together, nearly 2 billion euros were invested in offices in inner Paris, a sharp 111% increase compared to Q4 2019. T HE FR E NC H INV E S T M E NT M A R KE T RE VIE W OF 1S T QUA RT E R 2020 FRENCH INVESTMENT MARKET l Q1 2020 In the Western Crescent, activity held up well, even though 40% of the volumes invested in this sector in Q1 2020 (approximately €1 billion) were generated by one large transaction: the sale of Cap Gemini's new offices ("Aquarel"), inaugurated last year in Issy-les- Moulineaux. In the Inner Suburbs, a few transactions also boosted volumes, such as the sale by Gecina to Primonial Reim of "Valmy" in Montreuil for more than 200 million euros. Following an outstanding year in 2019 – the second best in history after 2007 – the La Défense market meanwhile slowed down. However, several major transactions were well advanced there before the outbreak of the health crisis. Outside of the Greater Paris Region, activity was most dynamic in Lyon, with more than €300 million invested in offices and a number of large transactions, including the acquisition by Aviva Investors of "Lugdunum" and the sale of Cegid's headquarters to Kanam. Source: Knight Frank /*Offices, retail, industrial. Breakdown of French investment volumes, by asset type (as at Q1 2020, as a %) French investment volumes, all asset categories* In millions of euros Source: Knight Frank
  • 4. 4 With more than €1.3 billion invested since January, the industrial real estate market also began 2020 on a strong footing having set a new record in 2019. This volume, up sharply by 68% year- on-year, accounts for 22% of the total sums invested in France, all types of assets combined. Furthermore, it is largely comprised of logistics asset transactions, most of which were sold in the form of portfolios (sale of the “Hub & Flow” portfolio to Ivanhoe Cambridge, acquisition by Patrizia of a pan- European portfolio, etc.). Investors' enthusiasm for logistics also translates into increased risk-taking, as illustrated by Invesco's acquisition of two warehouses to be developed speculatively near Orleans and Reims. Following a good year in 2019, the retail market got off to a more timid start, with this asset class posting a sharp 33% year-on-year decrease. Retail investment volumes were significantly boosted by Mata Capital's acquisition of the “CIFA Fashion Business Centre” in Aubervilliers, Europe's largest ready-to-wear wholesale centre. FRENCH INVESTMENT MARKET l Q1 2020 Investment volumes in industrial property in France In millions of euros Investment volumes in retail in France In millions of euros French industrial investment volumes Share of industrial French retail investment volumes Share of retail (%) Source: Knight Frank Source : Knight Frank Examples of significant transactions in Q1 2020 ASSET TYPE SELLER BUYER AREA (SQ M) Mercury Portfolio, France Logistics GreenOak Patrizia - 14 rue Bergère, Paris 9 Offices BNP Paribas LaSalle Investment Management 33,000 Aquarel, Issy-les-Moulineaux Offices AXA DTZ Investors 33,500 Hub & Flow Portfolio Logistics Carlyle Ivanhoé Cambridge - CIFA Fashion Center, Aubervilliers Retail Eurazeo Mata Capital 40,000 Le Valmy, Montreuil Offices Gecina Primonial Reim 28,000 50 rue d’Anjou, Paris 8 Offices Crédit du Nord Aviva Investors 10,600 79-81 boulevard Haussmann, Paris 8 Offices Groupe Roullier Balzac Reim 5,700 Lugdunum, Lyon Offices Unofi Aviva Investors 21,200 22-32 rue de Clignancourt, Paris 18 Offices BNP Paribas Vinci Immobilier 11,000 Other significant retail transactions drove activity, including the sale of five Casino supermarkets to Ascensio for €85 million, and the purchase by a private individual of 56 avenue Montaigne, a mixed-use asset comprising two luxury boutiques.This transaction accounted for 45% of high street investment volumes, which were down 11% year-on-year. Finally, the shopping centre market remained virtually flat, even though the beginning of the year was marked by a major event: the formation of a consortium between Crédit Agricole Assurances and La Française to acquire shares in a joint venture involving five shopping centres owned by Unibail-Rodamco-Westfield. Q1 2020
  • 5. 5 FOC US ON… COVID- 19 A ND A S IA’S INV E S T M E NT M A R KE T FRENCH INVESTMENT MARKET l Q1 2020 Since the Asian continent was hit very early on by the spread of Covid-19, with the first confirmed cases of infection appearing as early as November 2019, it is already possible to measure the effects on the real estate market. Indeed, the volumes invested in commercial real estate in the Asia-Pacific zone fell sharply by 59% year-on-year in the first quarter of 2020, totalling US$18.1 billion compared to US$44.2 billion for the same period in 2019. While the downturn was contained in South Korea (-10%), a country that has so far managed to control the pandemic, activity fell sharply in China (-72%) and Hong Kong (-81%), whose market was hit by both the health crisis and political unrest. Will the Asian market soon recover from the health crisis? Over the past few weeks, the first signs of recovery have indeed been seen. In China, whose economy was virtually shut down in February, manufacturing production has resumed, while some hard-hit sectors, such as hotels and tourism, are slowly picking up. However, as the threat of a second wave emerges, some restrictions have been kept in place, or in some cases re- established, and border controls have been tightened to prevent the entry of new cases. Japan has resolved to declare a state of emergency in the seven prefectures which account for 44% of its population, while Singapore has just initiated a one-month lockdown as it deals with a second wave of infections. Although caution is still called for in Asia, uncertainty is at its highest level in other parts of the world. Europe and the United States accounted for more than 75% of the total number of officially recorded cases as of 8th April 2020 (compared to only 5% for China), which explains the extension of drastic restrictions that will weigh heavily on their economies. This slump will inevitably affect the performance of the Asian economy. While the WTO recently indicated that world trade could fall by between 13% and 32% in 2020, forecasters agree that China's GDP will contract significantly, growing by no more than 1-2% for the current year after a 6.1% increase in 2019. The real estate investment market will inevitably suffer from the economic downturn, although some market sectors will recover faster after the crisis. This is the case for the residential market, which has already seen a slight recovery. For example, the daily number of sales in China's 30 largest cities at the end of March returned to its early January level, and was even slightly above the December 2019 average by 4%. The recovery is slower in the commercial real estate market. Across all countries, property sales are still constrained by ongoing restrictive measures, and investors are giving priority to managing their existing assets to reduce the risk of rental vacancies and maintain the value of their properties. This is especially the case for Korean investors, who had notably driven the French market in 2019, buying €3.4 billion worth of assets in the Paris region, and who, despite some significant transactions (the "Tour des Finances" in Brussels, the OP Financial headquarters in Helsinki, etc.), have been much more restrained since the beginning of 2020 outside their home market.
  • 6. 6 % CHANGE IN INVESTMENT VOLUMES IN THE ASIA-PACIFIC REGION Q1 2020 / Q1 2019 Offices, retail, industrial and hotels, as a % FRENCH INVESTMENT MARKET l Q1 2020 APAC SINGAPORE HONG KONG SOUTH KOREA CHINA -81% -81% -10% -72% -59% TOTAL ASIA-PACIFIC $18.06 billion In spite of this, some observers are hoping for a fairly rapid recovery of activity in the commercial real estate market, as was the case in the early 2000s in China, Japan and Singapore once the SARS epidemic had been contained. At the beginning of 2020, investors' appetite remains strong, and capital to be invested in Asia, which today totals nearly US$40 billion, is well above the level that existed before the 2008 financial crisis (US$5 billion). In this context, core assets will be the main target of investors as they are traditionally more resilient to economic shocks. In terms of asset classes, a premium will be paid in particular in China to logistics warehouses and data centres, two market segments that were already booming before the health crisis and were boosted by the lockdown period imposed on the population. In the office sector, demand will focus on service sector assets in the largest cities, particularly those that were the least affected by the health crisis, such as Singapore and, in China, Beijing and Shanghai, even though rental activity is still constrained by companies’ lack of visibility and the continuation of certain restrictive measures. However, the recovery could be facilitated by a readjustment in the balance of power between tenants and landlords, with the latter being more inclined to revise their rents downwards. The magnitude of the expected correction in the hotel and shopping centre segment is much greater. Here, indicators remain in the red and the recovery is not yet perceptible. However, opportunistic investors are already on the lookout for opportunities due to the large price drops that have been forecast. Source: Knight Frank
  • 7. 7 Can we learn from this for the future? Nothing is less certain. Firstly, because the situation will remain very unclear until we have a clearer picture of the consequences of Covid-19 on the world economy and on the rental markets and, secondly, because this is a health crisis and not a financial crisis. What usually takes months or quarters to happen in a recession is happening in a matter of weeks. Michelle Meyer, Chief US economics at Bank America Merrill Lynch Indeed, the efforts made since the end of the 2000s have helped to strengthen the international financial system, which, together with the huge and unprecedented support measures announced by governments and central banks, could help to cushion the shock of the pandemic. WHAT IS T HE OUT LOOK FOR T HE FR E NC H INV E S T M E NT M A R KE T ? Others that are sufficiently advanced will be finalised in the second quarter. The first half of the year, nevertheless, is likely to be the weakest in recent years. It should be remembered that volumes invested in the first half of the year have averaged €10.3 billion over the last five years, compared with €6.2 billion since the beginning of 2020. The magnitude of previous crises can, however, give some indication. While the stock market crash of 2001-2002 resulted in a fairly limited decrease in the sums invested in France (-20% between 2001 and 2003), the financial crisis of 2008 was quite different, with volumes falling fourfold in two years (from €28.5 billion in 2007 to €7.1 billion in 2009). The downturn was all the more severe as activity had previously set a new historical record after four years of consecutive increases. The Covid-19 crisis also comes at a high point: since 2013, the sums invested have been constantly increasing, rising by 141% to €37.6 billion in 2019. Before the outbreak of the health crisis, foreign investors were directly contributing to the excellent dynamics of the French market. In 2019, they accounted for 44% of the sums invested in France, a share that rose to 58% in Q1 2020. Will the presence of foreign investors still be as important in the coming months? The first indications are fairly positive. Some are completing transactions initiated before the start of the health crisis. Others are already thinking about the future, even if a wait- and-see attitude will prevail as long as market conditions remain uncertain. French investors will be just as cautious, which will inevitably weigh on the level of investment volumes in 2020. Other, more "practical" constraints will also limit activity (inability to visit properties, slowing down of urban planning procedures, etc.) even if technological advances (remote meetings, electronic signatures, digitisation of sales deeds) partly make it possible to circumvent social distancing measures. Moreover, transactional activity did not quite come to a complete stop with the health crisis. Several transactions have thus been recorded since mid-March. FRENCH INVESTMENT MARKET l Q1 2020 Investment volumes in France, breakdown by nationality Source: Knight Frank Investment volumes in France, all asset categories In millions of euros Source: Knight Frank 1st half 2nd half Q12020 €40,000 €35,000 €30,000 €25,000 €20,000 €15,000 €10,000 €5,000 €-
  • 8. 88 Nevertheless, several questions remain. Since the Minister of the Economy and Finance recently urged economic players, and in particular banks, to "play the solidarity game" by helping to safeguard businesses and jobs, could this shift in the banking system in favour of the real economy limit the sums allocated to the financing of commercial real estate? Inflows will also have to be carefully analysed, as some French people will most likely see their savings capacity eroded by the economic slowdown. In 2019, inflows had reached record highs, with a 20% year- on-year increase in life insurance and a 57% year-on year increase in SCPI/OPCIs. The latter had also increased their investments in the French property market, with a 24% share of investment volumes in France (19% in 2018), albeit down to 11% since the beginning of 2020. Although the figure for SCPI/OPCI inflows in Q1 2020 is not yet known, the figure for life insurance, on the other hand, shows a first tendency, with a 58% year-on-year decrease at the end of February. Could this drop, which is related to the decrease in yields, be exacerbated by the health crisis? FRENCH INVESTMENT MARKET l Q1 2020 Investment volumes in France, by type of buyer, as a % What will become of SCPI/OPCIs, whose appeal could be diminished by the high level of uncertainty surrounding the economy and the performance of the real estate sector? In spite of everything, real estate should still keep a prominent place in investors' investment strategies. Indeed, the French market is entering this crisis with better fundamentals than in previous crises. The spread, which clearly favoured the real estate sector before the outbreak of the health crisis (a spread of 275 bps with the 10-year OAT rate at the beginning of 2020 compared to 215 bps in 2008) should thus remain positive due to the support measures taken by the State and the ECB. As for the equity markets, they are very turbulent. Moreover, LTV levels are significantly lower than those seen before the 2008 financial crisis. Finally, the good health of the rental markets, with historically low vacancy rates and peak rental values in certain office hubs, gives reason to hope for a less severe crisis. Investors will judge the various market sectors by their resilience. They will therefore give preference to core assets in order to secure their rental streams against a background of rising business failures and rising vacancy rates. 24% 11% 19% 26% 37% 41% 7% 3% 4% 8% 3% 6% 11% 2019 1T 2020 Autres Fonds souverains Privés / Family Office Foncières Fonds Assureurs SCPI / OPCI Others Private / Family Office Funds SCPI /OPCI Sovereign funds Property companies Insurance companies Source: Knight Frank Change in prime yields Source : Knight Frank 2.75% 2.75% 4.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1T2020 Bureaux (Paris QCA) Rues commerçantes (Paris) Logistique (Ile-de-France) This will only accentuate a trend that was already underway before the outbreak of the health crisis, since the acquisition of core assets accounted for close to two-thirds of office investment volumes in the Greater Paris Region in 2019 and as much as 75% in Q1 2020. This increased market polarisation in favour of core assets could mitigate the rise in prime yields. Prior to the Covid- 19 crisis, prime yields were at a historically low level of 2.75% for the best office assets in the CBD, 100 basis points below the level recorded before the 2008 financial crisis. On the other hand, the health crisis is likely to put an end to the yield compression on secondary assets or assets in need of improvement, thereby restoring a risk premium that had tended to be eroded in recent years. Investors' enthusiasm for logistics, whose strategic role has been so obvious since the beginning of the lockdown period, should also increase, while other asset types, directly and heavily impacted by the health crisis (shops, hotels, etc.) will be subject to greater selectivity. Q1 2020 Q12020 Offices (CBD) High Street (Paris) Logistics (Greater Paris Region)
  • 9. 9 FRENCH INVESTMENT MARKET l Q1 2020 But these transformations could run deeper than a simple market shake-up. Before Covid-19, several epidemics had already marked the beginning of the 21st century, such as SARS, H1N1 and Ebola, and it is now clear that other scourges could appear in the years to come. This will lead investors and the entire real estate industry to better assess the health risk. In the office sector, for example, buildings and workspaces will have to be upgraded to ensure the safety of employees in the event of a new crisis. The Covid-19 crisis is also likely to encourage investors to better integrate other types of risk into their allocation strategy that, like climate change, could be a source of major upheaval.
  • 10. Contacts Vincent Bollaert CEO France +33 1 43 16 88 90 | vincent.bollaert@fr.knightfrank.com Matthieu Garreaud Co-Head of Capital Markets +33 1 43 16 65 22 | matthieu.garreaud@fr.knightfrank.com Antoine Grignon Co-Head of Capital Markets +33 1 43 16 88 70 | antoine.grignon@fr.knightfrank.com David Bourla Chief Economist & Head of Research +33 1 43 16 55 75 | david.bourla@fr.knightfrank.com © Knight Frank SNC 2020 Knight Frank's Research Department provides market analysis and strategic real estate consultancy services to a wide range of international clients, both private, institutional and end-users. Knight Frank’s reports are available on the KnightFrank.fr website. The data used to produce this study comes from sources known to be reliable, such as INSEE, ORIE and the Knight Frank tools for monitoring real estate markets. Although great care has been taken in the preparation of this publication, Knight Frank cannot be held responsible for any errors. Furthermore, since this is general market research, it does not reflect Knight Frank's opinion on specific projects or properties. Reproduction of all or part of this publication is permitted, provided that the source is acknowledged. 2019 Overview 2020 Outlook Commercial real estate in France Reports available at: knightfrank.com/research Recent publications Brexit #3 What are the implications for European property markets? Covid-19 What are its implications for the Greater Paris Region office market?