Author: SC
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1. The French Residential Market
The French housing market is peculiar: it is characterised by a high vacancy rate of 8%[1], while it reportedly takes several months to find a studio in Paris[2] and apartments in Paris are estimated to be the most expensive in Europe on a price per m2 basis[3]. Market dynamics in France with regards to vacancy are diverging between important metropolitan areas and less populous areas. Also, there is a wide talk of affordable housing shortages, caused by the lack of supply in attractive metropolitan areas and in sectors such as student housing[4].
The year 2023 was a challenging year, with a strong fall in home reservations – BNP reported -32% YoY at the end of 1H23, and rising stock of homes for sale, while developer Nexity estimated -26% for FY23 and assumed in their 1Q24 update that the market had fallen -31% YoY. Bulk (institutional) residential investments, a key driver in the market, were down -75% YoY, highlighting a near-freeze of institutional residential transaction activity. These market dynamics negatively affected companies like Nexity, a residential and office developer pioneering mass timber construction, although demand from individuals (retail sales) proved relatively resilient, to an extent that provided a positive surprise for the market.
Residential yields in France ranged in 2023 from around 3% in Paris and other major cities like Bordeaux and Lyon (BNP, Catella) to around 4% in Marseille and higher in 2nd-tier cities. With long-term French government bonds currently yielding over 3%, the market may need either further downward adjustment in prices or at least strong conviction that long-term interest rates have peaked and current yield spreads (where positive) can only expand from here. Current political uncertainty in France given the snap elections is not supportive, but a new solid government coalition well received by the market and further interest reductions by the ECB could be positive catalysts in the next months and quarters.
2. French Construction Activity
In the last 15 years, residential construction never reached the levels achieved before the great financial crisis (Figure 1). The recent slowdown in the construction sector has been remarkable and comparable with those seen during the GFC and, after a sharp post-GFC recovery, during the European debt crisis.
Figure 1: French residential authorised and started dwellings (annualised). Source: Inspection Générale de l’Environnement et du Développement durable (IGEDD).
From a relative point of view (trend-adjusted), the housing market retraced back to levels last seen during or in the aftermath of the GFC (Figure 2) also in terms of price and sales. According to research by BNP Paribas, while new residential construction activity has been muted, there has been more business related to renovation[5], with transactions of existing homes growing significantly from 2007-2021, as opposed to the downtrend in housing starts.
Figure 2: French housing market, historical metrics. Source: Inspection Générale de l’Environnement et du Développement durable (IGEDD).
The situation for office construction has been similarly challenging (Figure 3), although the slow-down has been relatively moderate, if we consider that the office sector suffered in the last years not only from higher interest rates, just like the residential sector, but also from the work-from-home trend that overall should have been reducing demand for new office space. Office vacancy rates are relatively high in France, with sharp geographic differences: from ca. 2% for Paris-CBD to ca. 15% for La Défense[6].
Figure 3: French office authorised and started area (m2). Source: Inspection Générale de l’Environnement et du Développement durable (IGEDD).
3. France Demographics
French households have been growing at ca. 1% p.a. over the last 20 years, which is a reasonably solid pace for a developed economy. While they are always highly uncertain and subject to many assumptions, the official projections estimate household growth in a (wide) range between 2 and 6m people by 2050 relative to 2020[7], corresponding to household growth between 7% and 20% over 30 years, significantly below the 1% rate achieved in the last 20 years.
The main contributors to this growth have been singles and couple without children (1-person and 2-persons households), as shown in Figures 4 and 5. This trend, in principle, supports demand for smaller apartments compared to single-family homes and larger units.
Figure 4: French households by structure. Source: Institut national de la statistique et des études économiques (INSEE).
Figure 5: French households – contribution to growth by structure. Source: Institut national de la statistique et des études économiques (INSEE). Calculations by Timber Finance.
[1] https://www.insee.fr/en/statistiques/7757339
[2] https://www.euronews.com/business/2023/11/04/housing-crisis-are-you-prepared-to-wait-6-months-to-rent-a-studio-in-paris
[3] https://housinganywhere.com/rent-index-by-city
[4] https://www.lemonde.fr/en/opinion/article/2023/09/07/france-s-current-housing-crisis-was-predictable_6127460_23.html
[5] https://economic-research.bnpparibas.com/pdf/en-US/Conjoncture-December-19-2023-12/19/2023,49171
[6] https://en.savills.fr/research_articles/256178/362952-0
[7] https://www.insee.fr/en/statistiques/7757373
4. Disclosures and Conflicts of Interest
Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.
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