"L'Edito"
Real Estate Investment – Rock bottom quest
Paris, June 25 2009
First sector hit by the crisis, real estate continues its endless fall.
Repricing has started with a yield shift directly stemming from the deterioration of financing conditions. Scarcity of available bank financing, lower financial leverage and higher fees have rubbed out the effect of lower interest rates and have directly impacted offered prices.
Adjustment has continued with rental values. The increase in available free space and the renegotiation of rents that were highly indexed in the past five years have led to a decrease in revenues. As buyers and sellers were about to agree cap rates, transactions have continued to clash on diverging opinions on rental values: anticipated by purchasers, the decrease in rents is just starting to be accepted by sellers.
Finally, the falling in prices, partially taken into account by experts in their year-end's appraisals has triggered a series of financial covenants breaches. Some investors are being urged by their creditors to rapidly sell their assets in order to try and rebuild a healthy financial situation. These special situations, associated with discounted prices, support the impression that the market can further go down.
Have we reached rock bottom?
Values have unarguably decreased but the fall extent is difficult to asses given the low investment volumes. Volumes recorded during the 1st quarter 09 have been divided by ten compared to last year at the same period, evidencing the gap between supply and demand.
However, market shivers. "Les Trois Quartiers" building at La Madeleine has been sold for €210m, an investment volume unprecedented since 2007. This transaction reveals how the market adapts to the current environment: 9% yield, sale price well below the last valuation figure and setting up of a vendor loan as a complementary resource to bank leverage.
This transaction also gives evidence of the change in some investors' opinion about the French market. They are attracted by the acceleration of price adjustment, the concentration of economic activity in the Paris region and the diversity of business sectors.
Real estate is cyclical by nature, and investors should target an entry at rock bottom. Today, lower interest rates and price adjustments create or will create in the short and mid term, attractive investment opportunities.