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Robert G. WATERLAND FRICS M anaging Director Société de la Tour Eiffel

Robert G. WATERLAND FRICS M anaging Director Société de la Tour Eiffel. The Paris Office Market in a nutshell. La Sorbonne Paris IV Institut d’urbanisme et d’aménagement 19 th October 2011. London and Paris dominate European office markets.

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Robert G. WATERLAND FRICS M anaging Director Société de la Tour Eiffel

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  1. Robert G. WATERLANDFRICSManaging Director Société de la Tour Eiffel The Paris Office Market in a nutshell La Sorbonne Paris IV Institutd’urbanisme et d’aménagement 19th October 2011

  2. London and Paris dominate European office markets Ile de France: largest market in Continental Europe and Eurozone • Paris : 52 million m² • Madrid : 14.5 million m² • Frankfurt : 12 million m² • Rhône Alpes : 20 million m² • French regions : ± 100 million m² 2

  3. Office development since 1981 Development starts 2009 2010 Source : ORIE 3

  4. A history of cycles (highs ) The commercial office market developed as a result of the emergence of the service economy from the mid 1960s. Previously offices were owned and occupied principally by state organisations (ministries, post, police) or were ancillary to industrial plants Average : 1.2 milion m² deliveries per year but 3 boom periods • 1968-72 : the “Manhattanisation” of Paris (La Défense, Maine Montparnasse, Beaugrenelle) • 1986-91 : Boom in anticipation of financial deregulation (big bang), European integration (1992) and lifting of developers agrément requirement • 1997-01 : Economic recovery. Internet bubble 4

  5. A history of cycles (lows ) Intervening busts ! • Late 1970s : successive oil crisis • Early 1980s : Mitterrand ! • Early 1990s : Economic recession in the wake of Gulf War • Early 2000s : Burst of internet bubble • 2007 : Subprime – Lehman Brothers 5

  6. Emergence of established office development sectors First stand alone offices were buildings converted from other uses, mostly residential Development market grew from golden triangle to • Main line station hubs : Montparnasse, Gare de Lyon, Gared’Austerlitz, Gare Saint Lazare • La Défense(inaugurated 1958) • Golden crescent – brown field sites following disindustrialization • Other inner suburbs on public transport routes (Saint Denis, Montreuil) • Outer suburbs and new towns Western sectors however have constantly held a dominant position 6

  7. Planning and licensing • The administration strove to channel development by a number of tools and the authority of the DATAR* • developer’s “agrément”, • occupier’s “agrément”, • “redevancebureaux”, • annual office tax to counter concentrations and an imbalance in offices between East and West • It also set an example : Banque de France, Marne la Vallée - Ariane Espace, Evry - Ministry of finance, Bercy – Caisse des dépôts, Paris Rive Gauche • Over the years, these artifices have been relaxed with no real detrimental effect on geographical market balance • Developer’s “agrément” however remains a decisive tool in the regulation of office development in the Region and the quest for parity with residential 7 • * Délégation interministérielle à l’aménagement du territoire et à l’attractivité régionale

  8. The occupational market Main office sectors as defined by Immostat Paris Centre West Southern Paris North-Eastern Paris La Défense Western Crescent Inner Rim Source Immostat / Jones Lang Lasalle 8

  9. Annual global take up Paris office market performance is generally correlated to global economics Gross take up (million m²) France GNP (%) Global growth (%) Expected end 2010: + 2.2 million m² Gross take up (million m²) France GNP (%) Global growth (%) Expected end 2011: + 2 million m² Madrid : 500,000 m² Frankfurt 450,000 m² Brussels 400,000 m² Lyon 200,000 m² Source CB Richard Ellis / Immostat / INSEE / FMI 9

  10. Annual vacancy ratelowest in Europe Comparableaverage Madrid : 13.0% Frankfurt 15.0% Moscow 17.5% Source CB Richard Ellis 10

  11. Wide spectrum of demand Typical breakdown of take-up by user activity (> 1,000 m² ) Source CB Richard Ellis 11

  12. Typical annual demand profile of > 5 000 m² by sector Domination of the West Demand Supply North inner rim Paris CBD Western crescent East inner rim Paris ex CBD South inner rim Source BNP Paribas Real Estate 12

  13. Annual rental progression Net average rent for prime and/or new space > 1 000 m² Average rent Prime Paris CBD Average rent Prime Western Crescent Average rent Prime La Défense Average rent new, refurbished, renovated Ile-de-France 13 Source CB Richard Ellis

  14. Current letting market • Market weakness due to global economic environment rather than intrinsic supply and demand equation • Positive GDP growth superior to 2% pa required to absorb unemployment in the service sector and increase office demand • Despite respectable level of transactions, 2 million m² per year, negligible net absorption of stock 14

  15. Consequently • Immediate supply : 3.65 milions de m² / 7.0 % vacancy rate • Downward pressure on rents • Substantial landlord concessions on leasing • Dichotomy : prime/secondary new/second hand • Should be noted that of 52 million m² overall stock probably 35% occupied by administrations that is never transacted (viz. vacancy rate) • Tenants have been able to renegotiate passing rents which has helped limit vacancies 15

  16. However new supply pipeline is drying up 4 500 French office development pipeline Speculative millions € Pre-leased 4 000 3 500 3 000 2 500 2 004 2 000 1 500 943 1 000 584 254 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 S1 Source BNP Paribas Real Estate 16

  17. Future projects dependent on feasibility and finance In m² Source Jones Lang Lasalle 17

  18. Current rental values Weighted average rents as at 1st July 2011 Trend compared to 1st July 2010 Source CB Richard Ellis / Immostat 18

  19. Pyramid of rental transactions Every picture tells a story 19

  20. Variable sector outlook • Traditional Paris intra muros market: stable, reduced rents (-30%) rekindle demand • La Défense : large space takers; highly cyclical both in terms of supply and demand – under pressure! • Emerging markets : Saint Denis, Boulogne, Montreuil, Issy-les-Moulineaux : weak demand relative to supply, market equilibrium varies • No real overall change anticipated before 2013,despite low supply inventory. Improvement largely dependent on gradual employment recovery 20

  21. Current occupational trends • HQE / green – 11% of available supply • Large enquiries invariably motivated by regrouping (60%) and rationalisation. Centrifugal forces spinning tenants out of the CBD and la Défense: • Lower operating costs • Higher occupational density • Energy efficiency • Move towards horizontal, campus style, space often preferred by new generation management But public transport a prerequisite • CBD small lettings dominate • Second hand space partially recovering thanks to rental adjustment • Rental renegotiation on existing leases largely over but could reappear • 93% of enquiries are for leasing as opposed to acquisition • For larger transactions, negotiation periods trending outwards (450 days average) 21

  22. Future occupational trends • Flat market dominated by tenant rotation with limited future growth until 2013/14 • Cost cutting and rationalisation will continue to be key drivers for demand • New developments to remain targeted by tenants leading to shortage in some areas • Gradual reduction of landlord concessions – balanced market in terms of supply and demand • Horizontal versus high rise! 22

  23. Not forgetting Grand Paris Project Fast underground Tram-train Tram Underground Express road Presidential project Economic or urban pole 23

  24. Grand Paris • Ambitious project to create international metropole capable of rivaling New York, London Shanghai and Tokyo – Presidential initiative • Creation of economic poles around Paris with comprehensive interconnecting transport links • Timing 2009-2025 • Finance ? : €30-35 billion • Political ramifications – opposition parties against • Little if any discernable influence on market as yet, except for indirect tax hikes. Sustainability a far more relevant issue. 24

  25. The investment market • Largest city market in Eurozone • Created by the British investors and their advisors in the 1970s • Over the years structural changes have helped to develop and improve the market • Registration duties reduced from 20% to 5% late 1990s • Longer leases • SIIC regime (2004 – equivalent REIT) • Deregulation of occupational market (agrément) • Increased professionalism: • Chartered surveyors • Due diligence • Advisory • Benchmarking 25

  26. The investment market Investment in French offices since 1992 Speculative bubble spurred by leverage In €bn estimated Source Keops 26

  27. Investment market trends • Severe impact of world financial crisis, notably lack of liquidity • Value adjustment more rapid than previous crisis • Following falls, values now stable • Low volumes centred on core properties (risk aversion) • Lack of financing limits lot sizes (Bâle III exacerbates) • Limited evidence of distressed sales • Anticipated orderly work out of defaulters by banks 27

  28. Yield pattern 4.75% 3.69% 1.18% 28 Source CB Richard Ellis

  29. Typical office yields 29

  30. Investors Large panel of players both national and international: • Insurance companies • SIICs • Private funds / family offices • OCPIs • Pension funds • International (German, UK, US, Spain, Italy, Korea, Middle East, etc…) • Currently French insurance companies and international family offices dominate the market driven by identifiable yield and long term capital growth considerations 30

  31. Developers • Cogedim • Bouygues • Nexity • Icade • Vinci • HRO 31

  32. Agents and advisors Concentration is the order of the day • BNP Paribas Real Estate • (nb DTZ) • Jones Lang Lasalle • (nb King Sturge) • Cushman & Wakefield • CBRE • Keops • (nb UFG-Colliers) • Savills 32

  33. Associations • European Real Estate Association • Fédération des SociétésImmobilières et Foncières • Institut de l’EpargneImmobilière et Foncière • Royal Institute of Chartered Surveyors • European Goup of Valuers’ Association TEGOVA • IPD 33

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