Vive la France

This week, PERE climbed aboard one of Eurostar’s high-speed trains that departs from St Pancras International to Paris 15 times a day, and it was an interesting experience. It hasn’t always been the case, though.

For a long time now, a trip to the French capital has never really felt anything other than a pleasant change of scene – swapping red buses, black taxis and umbrellas for Haussmann-style buildings, cafes and designer shops – a city in a country neither inferior nor superior to London, just different.

However, nowadays the journey and arrival in Paris has an added twist because the economies of the UK and France are no longer as similar as they used to be.
 
This week, for example, those leaving St Pancras station on the Eurostar did so clutching a free British financial newspaper with a splash that the UK economy is “warming up” and that growth is returning to Britain twice as fast as some official estimates. Over in Paris, meanwhile, there is no such feel-good factor. Quite the reverse actually.

As Laurent Halimi, partner at Paris-based Weinberg Capital Partners puts it, France is in “structural recession”. At the same time, real estate opportunities are being created as a result, and that is reason to get excited.

France, it seems, has suddenly become the latest destination for those seeking higher returns from real estate following the UK in 2009, Germany, Ireland and more recently Spain.

Some GPs suggest one has to go back to the mid-1990s for the last time opportunistic real estate fund managers had good cause to get really interested in France, but that was a very different market back then.

US firms such as Goldman Sachs’ Real Estate Principal Investment Area (REPIA) were swooping in to hoover up large non-performing loan portfolios. They were doing so armed with leverage and frankly, buyers were saved and rewarded in equal measure by the upturn in the French market that followed the buying spree of that period between 1996 and 1998.

The current French market is nothing like that. It is a ‘special situation’ as France is suffering from structural problems such as weaker economic output, unemployment standing at its highest level for 14 years, budget deficits and subdued external demand. Fitch, the ratings agency, recently stripped the country of its Triple A rating citing deepening political, financial, and monetary problems within the Eurozone, with which France is so closely linked.  

Unlike in the mid-1990s, real estate investors do not believe opportunistic returns will come from an economic bounce back in France over the next couple of years because it will take that long to sort out France’s problems, and it won’t come from large non-performing loans as  financial institutions can hold onto them in a low interest rate country.
       
Instead, the opportunity to make 20 percent returns is coming from elsewhere. It will take harder work, but it lies in properties that fail to tick every box in order to be qualify as ‘prime’ (for which there is still big demand from domestic institutional investors because the yield from prime property is still more attractive than for bonds and equities).

Opportunistic investors are looking for properties that the French institutions won’t touch because they are management intensive, or do not possess a super prime location or require some form of asset management. For such properties, one can get a high discount, says TwentyTwo Real Estate founder, Daniel Rigny.  

Weinberg Capital Partners, which yesterday announced the first close of a €150 million France opportunity fund, senses opportunity is coming from three directions: “end-users” being companies that own their real estate that are struggling financially; private owners and rich individuals who in some cases are leaving France; and, partnering developers on certain projects. Redevelopment and asset management is a part of the strategy, though it isn't building in rental value uplift assumptions like people did in the 1990s. The trick is in the entry pricing and in ‘manufacturing’ core property using local intelligence, says Halimi, who reports interest in the fund coming from European investors and also from some US investors.

London-based Patron Capital, which is heavily backed by US institutions, is interested in France too. The firm said in an interview with the Financial Times last month that it planned to invest €500 million in France in order to take advantage of low levels of liquidity in the real estate sector. It has just made an acquisition of a €70 million office block in the outskirts of Paris.

Given the long time frame expected to work out the nation’s structural problems, it could be that France will present rich pickings for some time to come. No-one expects a re-run of the 1990s, but next time you are in the Eurostar buffet car, chances are the man in a suit sipping coffee and eating a croissant is contemplating finding himself an opportunistic real estate deal.