Investment Trusts

A postcard from…Paris

Tired of fog? Try the Frogs!* Paris, City of the Future

20/02/2017

Tony Smedley

Tony Smedley

Head of Continental European Investment

Oliver Kummerfeldt

Oliver Kummerfeldt

European Real Estate Analyst

Jeff O'Dwyer

Jeff O'Dwyer

European Investment Manager

Contributes to
Unstructured Learning Time

CPD Accredited

When Paris is in the news these days, the focus is overwhelmingly on the effects of Brexit on the French capital. After all, Paris is only 350 km away from London and the current uncertainty around the effects of the UK leaving the EU on London’s financial sector could be huge. Since the referendum, speculation about potential moves of London-based institutions to Paris have multiplied.

And while the EU-exit of Britain might “push” some companies to the continent, France and Paris themselves have started to try and “pull” companies to their shores. Just a few weeks after the referendum for example, the then French prime minister Manuel Valls announced a series of measures to reinforce the position of Paris aimed at improving the “fiscal and regulatory” environment to “welcome many companies” and make Paris the “capital of smart finance”. The French government is also setting up an organisation to assist foreign corporates with administrative tasks and promised to open international sections in school so children can be taught in their mother tongue.

The Paris business district of La Défense has meanwhile launched its own campaign to lure banks and businesses from London, arguing that the area offers ample supply of quality office space at much lower rents than London using the slogan “Tired of the fog? Try the Frogs! Choose Paris La Défense”. La Défense is of course one of the largest business district and home to ca. 500 international companies employing ca. 180,000 people already so it has a certain critical mass. The area is also well connected by public transport and the majority of European capitals can be reached within 3 hours by plane.

But it is of course not that simple and while rents might be cheaper, rigid French labour laws, high taxes and high incidental wage costs could deter companies. And Paris is of course not alone with other cities throwing their hat into the ring, too. Frankfurt, seat of the ECB, is actively promoting itself as an alternative for the finance sector. And smaller financial centres like Dublin, with a young, well-educated English-speaking population or Luxembourg with a strong background in fund services could benefit from Brexit, too. Some recent announcements have also put Amsterdam and Prague on the map and some commentators think it might not be Europe after all with New York, Hong Kong or Singapore benefitting.     

Strong demand for offices

What has gone largely unnoticed in this debate is that Paris is already undergoing a transformation. The French economy is recovering and though improvements are gradual, conditions are nevertheless expected to continue to improve. The wider Paris area that generates ca. 30% of French GDP continued to deliver above average GDP growth in 2016 despite a number of disruptions like the November 2015 terrorist attacks, the flooding in June 2016, and union-led protests against labour market reforms. Unemployment in the Ile-de-France also remains lower than national levels, particularly in central Paris.        

These improvements are also being reflected in the French capital’s huge 52 million sq m office market. Following a rebound in 2014 and with a busy 2015, office take-up increased by 20% over H12016.The momentum held up in Q3, the first quarter after the Brexit-vote. With activity being broad-based and across all size bands, both in terms of number of leases signed and volume of space taken, major brokerage companies remain optimistic about the outlook for office demand. Conditions are also further improving on the supply side. Completions as well as the volume of space under construction moderated in recent quarters and the overall vacancy rate for the Paris region declined to 6.8% from 7.6% a year ago. Headline prime rents for the central business district (CBD) saw a 5.4% increase in the year to the end of September 2016.

With all these encouraging signs, it is worth remembering that Paris is not just “one market” and significant disparities between the individual submarkets remain. For example, vacancy in central Paris remains extremely low, with vacancy for example in the CBD or the 12/13th arrondissement at 3.9% and 2.5% respectively. On the other end of the spectrum, vacancy in the Northern Bend or the Peri-Défense still stands at 12.8% and 14.5% respectively. And while rents are stabilising or rising, (in some cases quite generous) incentives remain a feature of the market.

New infrastructure supports growth

Meanwhile – again somewhat overshadowed by the Brexit discussion – one of the biggest infrastructure projects the city has seen continues to progress with the “Grand Paris project”. The project announced by then president Sarkozy in 2007, will add a total of 205 km to the existing transport network (London’s Crossrail: 118 km) with the construction of four new lines and the extension of two existing lines. The main goal is to connect Paris neighbourhoods better together and make it unnecessary for passengers to connect via central Paris when travelling between non-central boroughs. The overall project is scheduled to complete in 2030 and will be delivered in phases.

One of the first projects will be the new Metro line 15 in the south of Paris. Work on the new line has officially started marked by a celebration on June 4th with more than 5,000 Parisians attending a ground-breaking ceremony at the site of the future Fort d'Issy-Vanves-Clamart. From 2022, the new line should be operational between the “Pont-de-Sevres” station and Noisy-Champs in the east of Paris. (The northern stretch from Pont-de-Sevres to Nanterre via Saint-Cloud is planned to come into operation by 2025 followed by the stretch to Saint-Denis via La Défense in 2027).    

The opening of the first stretch is expected to improve transport in Southern Paris significantly, particularly for commuters, as it reduces the travel time to/from some residential areas (particularly in the East of Paris) significantly and it is estimated, that over 60% of employees working in the vicinity of the new stations commute in.

A good example for an area that is expected to see a strong improvement in transport links is the borough of Bagneux.  Bagneux, located to the South of Montrouge, is currently connected by a number of bus lines as well as located  on the RER B line. The station is however located on the border with neighbouring Cachan, while the centre of Bagneux Is still mostly served by buses.  By 2020 metro line 4 will be extended by 1.8 km from “Mairie de Montrouge” with two new stations which should significantly improve the connections to central Paris. as services will run more frequently.  In addition, Bagneux station will provide a connection between line 4 and the new line 15 providing both North-South links via line 4 and an East-West with line 15. The arrival of these two new connections in the centre of Bagneux, coupled with real estate opportunities, are likely to boost the appeal of the location which currently has relatively little office space.

In conclusion, it remains to be seen what Brexit means for Europe, for France and for Paris. The city’s economy and real estate market continues to recover and it remains one of Europe’s most important centres with a global reach. The Grand Paris project will ensure that the city’s transport infrastructure supports further long-term growth and will increase the appeal of certain parts of the city – thus creating opportunities for businesses and real estate investors. And while there are maybe risks in the short term, be reminded of the motto of the city of Paris we used as a headline for an article published last year: “Fluctuat nec mergitur” - “(The ship) is tossed by the waves, but does not sink”. Clearly, Paris has been “tossed by the waves” in recent years…and continues to thrive.

 *"Tired of fog? Try the Frogs!Choose Paris La Defense." Slogan used to market La Defense in 2016

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.