Why investors are picking Paris real estate
International investors have been flocking to the French capital so far in 2019.
Paris has been the top city in the world for cross-border real estate investment this year, with demand from Asia and Europe helping propel it past traditional favorites like London and New York.
More than US$6.5 billion was invested in the French capital between January and June by cross-border buyers, more than any other city, according to JLL.
Investors from Asia, and in particular South Korea, were behind much of the increased investment activity. Hana Financial bought the Cristalia office building in the Rueil-Malmaison district west of Paris for EUR171 million through JR AMC, a Seoul-based REIT manager.
The largest deal came from Europe. Investment manager Swiss Life bought a portfolio of 28 offices for more than EUR1.7 billion.
“Appetite for Paris is reflective of global institutional investors’ search for opportunities in gateway cities across Europe,” says Pranav Sethuraman from JLL’s global capital markets research team.
For years, London has been the gateway city of choice in Europe. But with uncertainty around the UK negotiating its exit from the European Union, Sethuraman says global investors are finding that the French capital can offer opportunities to deploy capital at scale.
“Large assets, either in portfolios or standalone, are what’s driving investment in Paris,” he says.
A city with a difference
Much of the foreign investment in the first-half was focused on the Paris central business district and the city’s La Défense submarket.
“When you look at the Paris office market, it offers not only those portfolios which we have seen trade in the past six months – but also big, single ticket towers,” he says. “There aren’t that many European cities able to offer that right now.”
While the past six months are impressive, Paris has always been a global gateway and was already seeing greater foreign capital inflows last year, when 48 percent of investment came from abroad, well above its 10-year average of 37 percent.
“The influx of foreign capital highlights the strength of the Paris market says Sethuraman. “It’s also intensified competition there.”
At the same time, capital values in the French capital have grown faster than in any other city quarter on quarter.
Increased investor interest has raised office pricing; prime yields are down by 25 basis points to 2.75 percent, making Paris the most expensive office market in Europe. However, with French 10-year bonds in negative territory at the end of the second quarter, Paris office investments are still providing comparatively positive premiums to investors.
Heightened interest is also making Paris a more liquid market – now the third most liquid real estate market in the world, according to JLL data.
Office space in Paris is in short supply and global investors are, he adds, attracted to a market where the average office vacancy rate is as low as 1.6 percent in the CBD.
“This is fueling rental increases,” Sethuraman explains, pointing to rental growth in the CBD of six percent during the second quarter and four percent in La Défense. “Both districts continue to attract capital.”
With competition intense among global investors and uncertainty continuing to keep London investment on the back-burner, Sethuraman says investors who typically prefer core may begin to look beyond central Paris for opportunities in the coming months.
“The attraction of Paris to global capital won’t go away and we’re likely to see more large transactions in the coming months and possibly greater trading of Paris assets between global investors.”