Commercial real estate: "Location and rental potential remain paramount".

Is commercial real estate still in high demand with investors?

Pascal Robic - Commercial real estate is still favoured by investors in a market marked by a decline in sales volumes. Faced with this strong demand, prices are being pushed up and prime yields continue to be very low: in France, they are approaching the 3% threshold. Investors are mainly looking to acquire assets portfolios through companies, as are SCIs (sociétés civiles immobilières). This allows them to benefit from a more advantageous taxation than within the framework of the direct purchase of a good.

In France, as in the other European countries, the trend since 2017 has been towards an increase in operations of several tens of millions of euros. This is particularly the case in Germany, where there are major economic hubs, whether in Munich, Frankfurt or Hamburg.

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Is the ground-floor of buildings more popular?

P. R. – It all depends on the location of the property. For example, investors will favour the acquisition of ground-floors in the centre of Paris - where these assets are more represented - and concentrate their research on locations in retail parks on the outskirts of cities. That said, investors prefer to carry out large transactions that include, among other things, ground-floors of buildings in their portfolio.

Investors coveting this type of asset have to face several difficulties: the weakness of supply, of course - this is particularly the case in the Parisian district, La Défense - but also increased competition, especially from individuals seeking good investments to supplement their retirement. In addition, it is more difficult to make a profit on small 50m2 areas such as buildings’ ground-floor: the number of tenants to manage is greater and the resulting rental management costs are higher.

The investment strategy can therefore be very different from one player to another. A real estate company, for example, uses loans to finance its real estate operations. As a result, they will tend to invest in larger, less risky transactions, such as retail parks. The rents collected must both repay the debt and serve the interests of savers. On the other hand, a civil society of real estate investment (SCPI) will finance its real estate acquisitions from its own funds and will prefer to make smaller investments on smaller assets, such as buildings’ ground-floors. Each actor has its own constraints.

What are the key criteria in the valuation of a commercial property?

P. R. – There are of course factors such as the amount of rent, the premises’ size or condition. But location and rental potential remain paramount. A good location depends of course on the purchasing power of the catchment area of the district’s inhabitants, but also on the competition from e-commerce which, incidentally, remains difficult to quantify. Certain sectors such as travel agencies or banks are very affected by this new form of competition. However, there is a growing interaction between e-commerce and physical commerce: some people need to locate the product in a shop before buying it on the Internet; similarly, a consumer may want to place an order on the Web and have it delivered to a store near his home.

In fact, investors need to be careful about the sustainability of the location. The rental security that a quality location offers lies in the ability to keep the tenant in place or to attract better tenants to improve the rent. This logic prevails for all commercial real estate assets in areas with high development potential.