French commercial real estate saw a recovery in capital values last year, recording 4.0% growth, according to the IPD France Annual Property Index. The rebound in values led to a total return of 10%.
The increase follows a cumulative decline in values over 2008 and 2009 of -12.7%, and while the recovering returns in 2010 remain below the levels seen before the downturn in 2008, annualized total return over a three-year period was positive, at 2.4%.
Income return saw a decline in 2010 of 30 basis points, partly offset by capital growth, while rental values continued to decline, at -0.3%, a shallower rate than 2009's -0.8%. Yield compression of 40 basis points, to 5.9%, helped to drive capital growth.
Retails and Offices delivered the highest returns for the year, 11.0% and 9.9% respectively, driven largely by a significant turnaround in capital growth. Retails recorded a 4.7% increase, with Offices at 3.6%. Industrials continued to underperform other sectors, with capital depreciation of -0.7%, though total return was still positive, at 6.8%.
Retails remain the strongest sector in the market over the long term, returning 3.8% over three years and 13.2% over 10 years. In 2010 growth was driven by the performance of Shopping Centers, which saw capital appreciation of 5.1%, compared to Other Retails which only saw an increase of 3.3%.
Offices, the largest sector in the market, saw a decline in capital values of -4.2% over three years, but returns varied by location and class of asset. The best performing assets were the most secure Paris CBD Offices saw total returns of 10.4% last year.
Residentials recorded the highest capital growth, of 6.3%, driven by large rental value growth of 1.8%, but only delivered a total return of 9.9%, due to a lower income return than the other sectors, at 3.4%. Like the rest of the market, performance in the sector varied considerably; Paris Residential saw capital growth of 8.4%, while Other Regions only experienced growth of 2.3%.
Stéphanie Galiègue, Managing Director of IPD France & Southern Europe, said: "After two years of negative movements, the real estate sector in France has posted a strong recovery in values for 2010, following the trends seen in other European countries. Results, as with the rest of Europe, are very much location and asset-specific. Investors are showing a preference for secure assets with good income, in a central and stable location. Thus we are starting to see the emergence of a two tiered system, as demand for these assets increases their value, and the rest of the market lags behind."
Among the 12 European commercial real estate markets released the French annual index ranked third, behind the United Kingdom and Sweden.