Good bets in Paris

In spite of current low demand, the city of romance still holds real estate attraction, writes Roxane McMeeken.

“In a matter of months, the French government has transported the property industry from obscurity to acclaim,” gushes a recent report from Deutsche Bank Real Estate. An imminent new tax regime has shone a spotlight on the French property market, revealing that it is definitely worth a look, claims the report. While tax changes affecting property companies should make them a better bet for investors, direct investment and investment through funds in French real estate are similarly appealing. According to Noel Manns, director of European property investment firm, Europa Capital Partners, the lion’s share of opportunities are to be found in Paris. “In France, the capital really is the only place to be, even more so than London compared with the rest of the UK or Madrid compared with general Spain,” says Mr Manns. Lyon, he says, is the closest thing to Paris, but “the provincial cities just aren’t good bets long term because there is so little liquidity.” Demand DIP Paris is not without its problems. Mr Manns admits the market is suffering from a slump in demand. “It’s not like the slump of the mid 1990s, it’s not that there is a large oversupply,” believes Mr Manns. “It’s rather that demand has collapsed.” Paris in fact enjoys some of the lowest vacancy rates in Europe – 4.3 per cent in the central business district (CBD), according to Deutsche Bank Real Estate. This compares with 10 per cent in Amsterdam and 8.6 per cent in Frankfurt. Mr Manns is confident that demand will recover in Paris “as soon as companies bounce back”. This makes the city a good investment for the medium to long term – five to 15 years. Nick Tyrrell, director at Deutsche Bank Real Estate, agrees that while demand in Paris is low, oversupply is not a problem. He points to a number of projects scheduled to be built in Paris in 2004. “In the last recession, plans for new buildings drawn up prior to the downturn were carried out, creating severe oversupply. It is not so this time – plans are being shelved,” says Mr Tyrrell. While supply conditions are relatively good, rents are nonetheless declining in Paris. Mr Tyrrell argues that this should not deter investors: “There was close to a 30 per cent rise in Paris office rents in both 2000 and 2001. The declines we are seeing now are due to a certain degree of bubble effect. I still see Paris as a good medium to long-term bet.” Significant trend Some particularly interesting areas for Parisian investment, according to Mr Tyrrell, lie outside the centre. “There is a different dynamic in Paris,” he says. “We are seeing a trend in locating outside the CBD. It’s difficult to say whether this trend will be huge, but it’s certainly significant.” Key suburbs are the area surrounding La Défense – the new business district on the edge of the city similar to London’s Docklands – and Sainte Denis, close to the airport Roissy Charles-De-Gaulle. Sector-wise, “the real opportunities are in industry,” says Mr Tyrrell. Over the past 10 years Europe has undergone a structural change in the way goods are moved around. Manufacturers formerly made goods in a factory, stored them in a warehouse and used proprietary lorries to take them to retailers. Now, manufacturers outsource the logistics of warehouse storage and haulage to large international firms. As a result, warehouse space is being concentrated in key spots. Paris is one of them, having two airports and being located at a cross roads between Mediterranean, Teutonic and Anglo-Saxon regions. Mr Tyrrell’s tip is therefore to invest in “newly built, large modern warehouses in Paris”.

Tax transparency The French government has approved proposals to transform the publicly-listed property company market, making it more appealing for investors. Corporate tax and capital gains tax are to be done away with. Listed property companies will next year become Société Immobiličre d’investissements (Siics), a new structure similar to US Reits and Dutch BIs. The companies will have to pay an “exit tax” to adopt the new structure, but it should then result in huge savings. Property stocks have risen 8 per cent on average, due to the imminent change, according to Deutsche Bank. Deutsche’s favourite stocks are Genica and Unibal because they have “the most proactive management teams to capitalise on this change.”