French revolution attracts German capital

Investment in commercial real estate in Paris is expected to rebound due to renewed investor trust in French economic prospects – a trend that will benefit German lenders, already a key source of debt in the market.

The second half of 2017 is likely to prove “extremely active” in the French investment market, especially for large-scale transactions, fuelled by positive momentum created by the election of President Emmanuel Macron and the resumption of rental growth in the French capital, research from CBRE suggests.

During the first half of the year, a wait-and-see attitude adopted by investors due to uncertainty arising from the French elections dented CRE investment volumes in the country, which fell 27 percent year-on-year to €6.8 billion.

A recent transaction and financing hints at a return of large opportunities. In late September, Munich-headquartered insurer Allianz Real Estate financed ‘Window’, a 44,000-square-metres prime office building in the city’s La Défense business district, acquired in July by Canada’s Oxford Properties. The 10-year loan of €300 million has a LTV ratio understood to be around 60 percent.

“We like French real estate fundamentals, with a positive movement on the rental side and lots of infrastructure projects coming up. The market shows positive signs and the economy is picking up,” says Roland Fuchs, head of European real estate finance for Allianz Real Estate, who is based in Paris.

CBRE notes that more and more players in the French market are betting on a resumption of rental growth.

German organisations have proved active in Paris in both investment and lending. During H1 2017, German investors’ share of the French investment market increased by around 10 percent – larger than that of their UK, North American, Middle East and Asian Pacific counterparts, according to CBRE.

“The behaviour of German investors in France has really changed as they see a more solid economic outlook and signs of a rising rental market,” says Christelle Bastard, senior researcher in France at CBRE.

“Also, German investors are currently not just focused on core assets in the best locations, they have diversified locations and assets seeking yields higher than 3 percent, which also broadens the scope for acquisitions in a market where high quality office space is scarce, particularly in Paris,” she adds.

German banks have a strong track record in France, although most are focused on large, prime opportunities in the French capital. In January, DekaBank underwrote a €290 million financing of a Korean investors’ purchase of So Ouest Plaza in La Défense. Looking forward, LBBW is planning to increase its French portfolio, with an initial target to provide €300 million of debt financing.

“In the longer term, we should be able to do half a billion on a yearly basis. Paris is a single market but it is huge: we want to become a regular market participant instead of an opportunistic occasional lender,” says Thorsten Schönenberger, a member of LBBW’s board of managing directors.

While several German banks have placed significant volumes of debt in the Paris market in recent years, domestic banks also remain focused on financing Parisian real estate. “French lenders are very aggressive in their domestic market, there is huge competition with their German peers,” a Germany-based debt advisor adds.

Despite challenges, a German debt provider says exposure to France is “a must-have allocation, especially for big lenders”, not only because it provides higher margins for core assets in the range of 20-30 basis points compared with their domestic market, but also because, as continental Europe’s second largest market, a presence in France is key to diversifying strategies