Investment in French real estate markets delivered a negative return in 2008, at -0.9%, for the first time in the 11-year history of the IPD French Property Annual Index. After three successive years in which total returns were above 15%, French markets finally succumbed to property markets' re-pricing cycle which has swept the globe.
The biggest sector drag on overall returns was Industrials, at -3.8%, followed by Offices, at -2.5%, while the Retail returned the best figures of the main sectors, at 1.9%. The Residential market also remained above water last year, returning 1.5%.
Rising yields across the sectors particularly in Industrials and Offices, which ended 2008 at an average of 7.5% and 6.2%, respectively drove capital values downwards. Capital growth on all property last year was -6.0%. Industrials and Offices produced the most significant negative capital growth, at -10.1% and -7.9%, respectively.
At the sub-sector level, the most significant negative capital growth returns were within Logistics, at -11.0%; Workshops, at -8.5% and; central Offices, including the Paris Central Business District and the Western Central Business District, which returned -8.3% and -9.1%, respectively. In Retail and Residential negative capital growth returns were more mooted, returning -3.4% and -1.9%, with shopping centres proving relatively resilient, returning -2.5%.
Overall income returns in 2008 were virtually on a par with 2007, falling just 10 basis points to 5.4%. The robust levels are owed to low vacancy levels and strong rental indexation. Over the long-term, French real estate total returns for three, five and 10 years on an annualised basis were 12.5%, 12.6% and 11.7%, respectively.
Christian de Kerangal, Managing Director at IPD France & Southern Europe, said: "The arguably mild negative capital growth, at -6.0% for 2008, was moderated by strong cashflows within institutional investors' portfolios. This was due to a series of
complementing factors: overall vacancy rates falling back to 2003 levels, strong rental indexation and the positive rental re-negotiations, the majority of which occurred mainly during the first half of the year.
"In addition, last year saw strong rent passing growth and still rising open market rental values. However, despite the positive overall figures for vacancies, some segments, notably Logistics, recorded a rise."
IPD has also published its separate IPD French Bi-Annual Property Indicator for the six-month period to December 2008. According to the Bi-Annual Index, total returns for the second half of 2008 were -4.7%, compared to 0.7% for the first half of last year.
The Bi-Annual Index, which comprises a significantly higher share of listed property companies than in the Annual Index, reveals negative returns across the three principal sectors, led by Offices, at -5.7%, then Retail and Industrial, at -3.6% and -2.7%, respectively.
The annual capital growth decrease, according to the Bi-Annual Index is -9.2% compared to a -6.0% on the Annual Index. This spread can be explained by the difference in the composition between the Bi-Annual Indicator and the Annual Index, both in terms of types funds included and in terms of sectors. The acceleration of negative capital growth in the Office sector was also much more pronounced in the Bi-Annual Indicator, at -11.2%, than in the Annual Index, which was -7.9%.
According to the Bi-Annual Indicator, the annualised total returns for 2008 were -4.1%.
Christian de Kerangal added: "The figures from the latest IPD French Bi-Annual Property Index clearly show that the decrease of capital growth has accelerated over the second half of last year. This is due to a more pronounced increase of the yields, which gathered momentum after investment bank Lehman Brothers collapsed into administration last autumn."