Decision makers. What are your convictions regarding the evolution of the French real estate markets given the health crisis?
Xavier Dennis. Overall, the future supply of the French tertiary market is under control and the vacancy rate remains low. Vigilance is nevertheless called for because the immediate supply had increased by 40% in the space of 18 months during the previous economic crisis. Regarding capitalization rates, we are confident because the risk premium for commercial real estate remains attractive. The evolution of rental values will be the sinews of war over the coming months. A slowdown in take-up is to be feared in the short term, but the quality of our buildings and their locations protects us. Last element, the current situation will impact the launch of speculative projects, which could offer us interesting opportunities because we have a great deal of expertise on the subject internally.
Businesses suffer more. Rental values will decline, with the increasingly strong desire of brands to democratize variable rents based on turnover. Under these conditions, we believe that retail parks will hold up better than other formats. Note, however, that some brands take advantage of this period to make requests unrelated to the health crisis and we must therefore study the files on a case-by-case basis.
We continue to watch the logistics asset class with interest. Investment volumes should hold up and new projects will take time to emerge, which will help to maintain rents. We are not directly active in the housing segment in France but this market offers a high degree of protection during a more volatile cycle.
The French business real estate market therefore has solid fundamentals. But we are entering a cycle where mistrust will prevail. Many players will be impacted by the scarcity of debt, the increase in its cost and by the solvency problems of tenants. Investors like AG Real Estate who enter this period with a high occupancy rate clearly have an advantage, since many users will prefer to renegotiate their leases rather than move. Regarding valuation, everyone is wondering about the future development. Real estate risk will probably reprice, which is a good thing.
Under these conditions, how is your investment thesis in France evolving?
Our history of skills being first built around the tertiary sector, offices will continue to represent our core target even if we will be a little more selective in terms of our operations and our locations. We will also remain active in logistics, a segment that we have mastered for several years in France, and we could diversify into residential because we have the skills in-house thanks to our exposure in Belgium. Mixed urban projects also remain within our scope because they represent the future of the city of the 21st century. The majority of the cases we will look at will be in Île-de-France because this is the market where we are most comfortable. We will favor value-added assets that require active asset management or projects to be developed that we will then keep as assets. The unit size of our operations is generally between 50 and 100 M€. We can also study larger volume operations within the framework of a partnership. But we study the quality of the subject more than its size. Regarding debt leverage, we invest without having recourse to it except in the context of transactions with partners.
We will therefore be one of the real estate investors who will remain truly active on the French market in the months to come thanks to our size, our equity financing capacity and our Paris-based teams who know how to manage complex files.
What are your ambitions in France?
We regularly rotate our portfolio to crystallize value creation. We recently sold a logistics portfolio to Allianz Real Estate in France. Our volume of assets under management in France currently stands at around €1bn. Our ambition is to have an overall portfolio, currently valued at nearly €7 billion, with 20-25% exposure to France.
Interview by François Perrigault (@fperrigault)