London’s office real estate market will see rapid growth over the next 12-18 months, while the Paris market will remain subdued as a result of ongoing sluggish macroeconomic growth, according to Moody’s Investors Service. UK GDP growth has been much stronger than France’s in recent years, although Moody’s expects that this gap will narrow in the longer term.
“We anticipate that the pace of growth in London’s commercial real estate market will remain brisk, aided by the strong economy, regulatory limits on new construction and occupier demand", said Maria Maslovsky, a Moody’s senior analyst. "This will benefit UK-based firms, such as British Land and Land Securities PLC", added Maslovsky.
Moody’s notes that prime rents are growing in London, recording a 5.8% increase between 2010 and June 2015 in the West End, compared with a decline of 2.8% in Paris CBD. There is also a disparity in direct real estate investment between London and Paris, with investment in London far outpacing that in Paris, where less favourable rental growth, combined with lacklustre economic growth lessens the incentives for new investment.
Although the UK experienced a steeper contraction of GDP during the financial crisis in 2009, it has recovered strongly since 2012, whereas France’s GDP growth continues to lag. Similarly, the unemployment rate in France was persistently higher through the financial crisis and shows no signs of abating, while the unemployment rate in the UK has been trending down since 2013. Still, Paris’s real estate market benefits from stricter permitting environment which prohibits razing existing structures.
Although the Paris market is seeing a decline, especially in large-block rental rates, Moody’s believes professionally managed real estate companies with diverse portfolios such as Gecina SA (Baa1 stable) and Fonciere des Regions (unrated) will continue to buck this trend and maintain relatively high occupancy rates. Similarly, Moody’s anticipates strong leasing momentum for Land Securities and British Land given their track record and the London market’s solid performance.
Because these office companies prudently managed their balance sheets while pursuing profitable growth opportunities, improvements in their performance will generally translate into stronger credit profiles. However in the longer-term an increase in supply or softening in occupier demand may pose risks.
