France – Investment Market
The majority of Rynda Group employees work in France and over the last 14 years the country has been a successful investment location for a range of our clients along the risk spectrum and across the breadth of commercial and residential uses.
However, all has not been well in the last two or three years.
Over the first decade of Rynda’s assignments in France a deep understanding of the market developed with not only a knowledge of where assets would trade but also a strong predictability of an asset’s net operating income and its likelihood of retaining and attracting tenants. This level of knowledge was built from employees embedded in their respective real estate markets and from practical experience of managing over a hundred assets of varying quality and type.
From mid-2016, and escalating in scale post the election of President Macron, our knowledge and experience seems to have become out of step with the market pricing Whereas previously our underwriting would be within a 5-10% margin of where assets traded suddenly we were finding our judgement was 20-25% awry. We, of course, subsequently analysed our assumptions and reflected on our judgements and in all but a few instances reconfirmed our initial net operating income calculations and exit capitalisation rates as our earnest view. We also retain our view that French tenant demand is still generally problematic and that the tax burden to investors and a rising interest rate environment should be reflected into greater underwriting caution.
So what have we concluded?
In essence the real estate fundamentals have not materially changed for the positive but pricing has got out of quilter due to;
- Significant demand from the weight of money raised by retail funds by French investment managers
- A fundamental over-exuberance of the short term economic gains and structural reforms benefits to the French economy arising from the election of President Macron and
- A tendency for French institutions to disproportionately focus on their domestic market that amplifies the impact of the success of domestic capital arising.
As such we remain very cautious as some of these drivers might soon start to unwind. Could the trigger of that unwind be the striking chaos on the rails and in the air, that starts the deflation of the Macron bubble?
France – Property Management
There are huge differences in the way the property management service market operates in France as compared to the UK and after 15 years of operation in both countries I am still unclear as to which is better.
In France there are laws that govern who can undertake rent/service charge collection activities and real estate sale and leasing services. For example, to undertake property management services a senior employee of the business needs to hold a personal professional card issued by the local police and the business needs to hold a bond for the maximum amount held at any time in client accounts – i.e. rent, service charge, VAT etc. before remittance to clients. The professional card is issued to a suitability qualified individual who is usually the President of the business whilst the bond requires membership (and annual fees) and subscription to a mutual society who hold investigation powers over member business.
On the positive the risks to real estate owners of the property manager misusing tenant receipts is in theory lower in France. However, on the negative the barriers to entry are very high to new entrants through additional upfront and annual operating costs and the time and money required to be invested to navigate the various registration and licensing requirements.
I am still trying to work out if the highly regulated market leads to higher fees in France.