Your scribe is a real old throwback; our lunch on 19th March was on a lovely sunny spring day, overlooking Hyde Park and to also have a young lady talking about Paris made remembering to keep notes a bit tricky.
Fortunately, Catherine Kervennic, Partner at Property Market Analysis gave us a very engaging talk, with lively questions afterwards. Her answer to the question set was simple – ‘no’. After a period of denial last year, reality has struck; vacancies are rising, investment yields are rising and rents are falling. However, in Catherine’s view, whilst Paris will have its ‘slump’, it will not be as deep as those in London, the US and Germany for example. She gave four reasons for this. First, there is less over-supply. Secondly, investment yields had not fallen to such low levels, nor rents risen to such heights; there is therefore not so much ‘unwinding’ to be done. Thirdly, because rents are more modest, tenants, whilst shedding staff (this is, of course, less easy than in the UK), are not so keen to shed the accommodation as well; keeping it until better times return is more affordable. Finally, in response to a question, there is not likely to be much distress-selling. Banks in France are better-placed than in the UK or US and will not be so keen to pull the plug, and anyway office properties are less geared-up, with much being owned by secure overseas sources.
The Paris office market is divided into three very distinct markets: the Central Business District, La Defense and the various inner Business Districts. Each of these has its particular dynamics because each tends to have its own tenant base – La Defense with the large space-users for example. This will lead to some variance. La Defense is likely to have over-supply problems because development is still occurring. By contrast, the Western Business District, with its particular and attractive ambience is proving more resilient. Nevertheless, across the board rents are falling, and Catherine found it indicative that landlords are now less forthcoming on discussing any incentives that they have given.
The decline in rents is having an interesting side effect. In France, in broad terms rents are generally linked, at review, to the building cost index. At most times, this has favoured tenants, but it now works against them. There is a further statutory provision that, if the index has risen by more than 25%, the tenant may opt to use a market comparison, which many are now doing. She wondered if, after this experience, tenants will be so keen to use the building cost index.
As to eventual recovery, Catherine considers that, as Paris entered its decline later, it is likely to start its recovery later. She does not see the ‘busted flush’ of London’s financial ‘expertise’ as an opportunity for Paris to gain competitive edge – London still has a unique advantage. There are also issues about France’s political direction. Whilst the present government was elected on a platform of reform, and has taken some major steps, there are signs, if not yet of reverse, of a certain slowing. This will not assist the present lack of confidence amongst employers.
Despite that, Catherine pointed out that Paris bears a different relationship to France as a whole from London to Britain. Paris is the place to be for many businesses, are there are no equivalent alternatives such as Bristol, Leeds, Edinburgh etc. This dominance must underpin its long term strength.
To me, the image Catherine gave was of a temporary market decline such as those we have experienced several times during my career, declines that, whilst awkward at the time, pass without serious damage. One wonders if that is quite what is happening in London.
Michael Mallinson