Braving weak French economy, investors pile into its property

Reuters

* H1 commercial property investment tops 10 bln euros- CBRE

* Yield-hungry investors unfazed by weak growth prospects

* Small number of big deals fuelling investment boom so far

By Leigh Thomas

PARIS, July 30 (Reuters) - Undeterred by a stagnant local economy and falling rents, yield-starved investors are pouring capital into France's commercial real estate market at the fastest rate since the start of the financial crisis.

Investors ploughed 10.7 billion euros ($14.34 billion) into French office, retail, logistics and industrial properties in the first half of the year, up 73 percent from the same period last year, real estate adviser CBRE said.

Enjoying the best start to the year since 2007, French commercial real estate investment could hit 20 billion euros for 2014 as a whole, the fastest growth of any major European market, it forecast.

The boom, focused mainly on the capital Paris, is all the more striking given France's fragile economic recovery, with business confidence lagging much of the rest of Europe and its companies still in a cost-cutting retrenchment mode.

"The investment market does not reflect companies' financial health nor the macroeconomic context," said Vincent Bollaert, head of office investment at Cushman and Wakefield. "This is a long-term investors' market with a lot of money."

London's commercial property market may be bigger, but with rising prices pushing rental yields there ever lower, deep-pocketed foreign investors are increasingly looking at Paris, the second most liquid regional market in Europe.

Rental yields in London's prime West End have fallen as low as 3.75 percent, while they are about 4.0-4.25 percent in Paris's central business district, rising to around 6.75 percent in the La Defense centre west of Paris, according to CBRE.

Despite declines, the short-term attraction for investors is a yield well above record low rates on government bonds, but the longer term appeal is that rental income is widely expected to grow as the French economy begins to gain momentum from its current point close to the bottom of the cycle.

So far this year a small number of big deals has driven the investment boom, including the purchase of Europe's biggest office complex in Paris's modern business district, once owned by investment bank Lehman Brothers, whose collapse in 2008 opened the floodgates of the financial crisis.

Though only 75 percent of the Coeur Defense complex's 180,000 square metres are currently leased, U.S. private equity fund Lone Star spent 1.3 billion euros to buy it in a bold bet on corporate demand for office space.

"There are more and more investors who believe in the French economy's capacity to recover over the medium term and also expect rents to rise in four to five years," said CBRE senior analyst Christelle Bastard.

Until then, investors may see rental income pinched as brokers report that corporate tenants struggling with weak business are bargaining hard to get rents down.

Loath to leave properties vacant, landlords are conceding discounts that can add up to as much as 30 percent of tenants' rent over the life of a lease in some districts, said Magali Marton, DTZ's head of European research.

"If your building is largely vacant and you can't easily cope with the lack of rents, you are willing to be a bit generous to get a deal signed and fill the building," she said.

RETURNS IN EUROS APPEAL TO SOME

The influx of money and foreign investors into a market dominated by French real estate investment trusts (REITs) and insurers is driving up prices and depressing rental income.

Rental yields - the rental income from a property as a percentage of its purchase price - are back down to levels last seen before the financial crisis erupted, according to CBRE.

Despite the decline, investors are satisfied with that when the alternative is government bonds; France's benchmark 10-year bond is yielding a record low 1.4 percent, and ultra-low risk German bunds even less.

Such was the thinking of Allianz Real Estate, the German insurer's property arm, when it spent 220 million euros earlier this year to buy offices fully let to investment bank Natixis.

"In light of yields, this alternative asset class seems relatively attractive to us compared to the bond market. That's our deep motivation," said Olivier Wigniolle, chief executive of Allianz Real Estate France.

With 4 percent of its global assets in real estate, Allianz used its considerable balance sheet to fight off seven other competing bids for the property without using any leverage. The prize was a rental yield of 5.5 percent.

For a euro zone insurer like Allianz, Paris has the advantage over London of offering real estate assets in the same currency as much of its liabilities, Wigniolle said.

BULL MARKET

As the market gets crowded, some are not joining the fray. French office property group Gecina cut its investment plans last week to 300 million euros from 1 billion before.

"This investment market has taken off with huge amounts of capital and not a lot of properties to sell," Gecina Chief Executive Philippe Depoux told Reuters.

"We made a lot bids for different projects, but we didn't want to overbid and we kept our cool," he added. "We will not fall for sirens' songs just to do deals at any price."

Taking advantage of strong investor demand, the company sold in February its 75 percent stake in Paris's recently finished Beaugrenelle shopping centre for 700 million euros to a group of private investors.

Falling rental yields pose a problem in particular for listed property groups that find themselves paying shareholders more than they have coming in from rents, Bastard at CBRE said.

For example, with a current dividend yield of 4.41 percent, Gecina gets squeezed when rental yields on prime office space in central Paris are only 4.0 percent. Some investors have sought exposure to the French market indirectly by simply buying into French real estate investment trusts.

Such is the case of U.S. private equity firm Blackstone and Canadian investor Ivanhoe Cambridge, which bought a 6.9 percent stake in Gecina this week, increasing their share in the REIT to 29.9 percent.

Despite the considerable sums flowing into the market, Cushman and Wakefield's Bollaert said that so far investors were shrewdly picking prime properties and shunning the rest rather than making bold bets on rising prices.

"We are not seeing a lot of silly mistakes, so it's hard to say that a bubble is brewing." (1 US dollar = 0.7462 euro) (Additional reporting by Mathieu Protard; editing by Mark John)

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