France’s High Council for Financial Stability has warned that the commercial property market may be a bubble about to burst. EURACTIV’s partner La Tribune reports.
Excessively high prices, falling returns, abundant supply, a high vacancy rate… the situation on France’s property market bears all the hallmarks of a bubble that may be about to burst.
For the commercial property sector, this is a very real threat, and one they should take seriously.
The High Council for Financial Stability (HCFS), a kind of supreme regulator attached to the Ministry of Economy, fears the commercial property market may undergo a “significant correction”, and that its value is overestimated by “between 15% and 20%, with figures close to 30% for certain segments like Paris offices”.
This market is showing all the signs of an impending meltdown. Firstly, prices keep going up: after starting to rise again in 2010, French property prices exceeded their 2007 pre-crisis levels in 2015. Then, as a direct consequence of the higher prices, rent incomes have begun to fall: of a group of five big eurozone economies (Germany, France, Belgium, Spain and Italy) France had the most profitable commercial property market in 2005. By 2014 it had become the least profitable.
Finally – and this is the paradox that has led the Ministry for Economy to fear the worst – demand for commercial property in the Île-de-France region (the region surrounding Paris), has remained consistent.
One of the main reasons for this is that the fall in interest rates in France has been faster than the drop in rental incomes, so property has been seen as a “safe investment”, according to the HCFS.
Other factors less rooted in reality also play a part. Used to considering French commercial property, particularly in the Île-de-France region, as a profitable investment, investors “failed to integrate the drop in profitability into their investment strategies”, the HCFS reported.
At a time when the French housing property market is suffering from a devastating lack of institutional investment and provides higher returns and better long-term growth opportunities, questions could be asked about the wisdom of certain investors taking big risks by choosing to buy office space.
The purely speculative behaviour of certain investors, who buy, renovate and sell property over a short time-scale, should also be taken into account. These investment strategies maintain a strong demand for this type of property and “generate profits disconnected from rental profitability”, according to the HCFS.
High vacancy rate
The situation is worrying, especially with the high vacancy rates that are currently being seen. In Île-de-France, for example, there are currently close to four million square metres of vacant office space, or around 7.5% of the total.
The immediate offer of office space has fallen since 2015, due to a slow-down of new construction. “Currently, the supply and vacancy data does not confirm the emergence of an episode of overabundant offer linked to excessive construction,” the HCFS said. But “the current conditions in terms of demand and the financial environment could lead to runaway construction”.