The effects of the global financial crisis have been delayed in the French real estate markets, but this quarter some downward trends are materialising. The average house price across France has begun to drop. BMI figures, drawn from national statistical agencies and independent researchers, show a 5.7% year-on-year drop in Q309, compared with a 2.8% year-on-year increase reported last quarter. Old apartments in Paris continue to rise though, with a y-o-y increase of 4% this quarter, compared with 5% reported in Q209. With unemployment in France up to 7.8% and over 178,000 jobs lost in Q109 according to INSEE, and tight lending conditions continuing, we can expect depressed demand for housing. Indications from Q109 are that take-up in the Paris office market will fall from almost 2,500,000m2 in 2008 to fewer than 500,000 this year, according to DTZ Research. A downward correction in office rental prices is expected in the coming months. Although prime office rents in the Paris CBD were stable at EUR820m2/yr in Q109, according to DTZ, falls of over EUR100m2/yr are expected by mid-2010, when pricing should bottom out. Incentives and flexible lease options are being offered and demanded, as landlords attempt to retain tenants in an increasingly competitive environment. Demand for industrial real estate is also down, but a key factor is emerging in the market for large warehouse space. Suppliers have recently begun to focus on restructuring their logistics as a way of cutting costs and improving service. Mergers and acquisitions also necessitate integration and restructuring of logistic operations. King Sturge predict increased consolidation in the third-party logistics sector, as companies outsource their logistics. Transaction volumes in the European real estate market fell by 30% from Q408 to Q109, according to DTZ. This level is down 80% from the peak of Q207. Total investment volume in Europe has fallen 70% y-o-y in Q109, with a 30% drop since the previous quarter. Investment in France fell by 70% during Q109 alone. According to Immostat, investment levels for 2008 in Paris are down 59% from their peak in 2007, with EUR8.4bn invested, mainly by French institutional investors and German funds. Real estate investment activity is expected to remain subdued across Europe in the coming months. The sharp decline in values and rental demand has left the pricing picture unclear, creating a stand-off between buyers and sellers. Liquidity can be expected to improve once yields stabilise and once again provide a sound basis for pricing. Knight Frank believe that investors 'are waiting to ascertain the timing of the bottom of the market before making any significant investments in Paris'.
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