The two dominant macro headwinds impacting the French real estate market are increasing mortgage rates and tightening credit supply.
Mortgage rates have increased rapidly over the past 12 months. In response, French banks have tightened lending criteria and reduced mortgage approvals, constricting the credit supply.
Banks are reluctant to grant mortgages in an environment of rising refinancing costs. Mortgage approval rates have fallen by c.40% since the beginning of the year and sales to private individuals have dropped in response, notably in the EUR6000-14,000sq/m price bracket. Demand has remained resilient below the EUR6000sq/m price point. Above EUR14000sq/m, buyers are typically mortgage free and therefore unaffected by interest rate rises.
Despite these macro headwinds slowing demand in some areas of the real estate sector, the Mirabaud Sustainable Cities strategy remains resilient. Here's why:
1. Low inventory
The primary factor that can decrease real estate prices is excess inventory in the market.
In the energy-efficient, new-home sector that we focus on, unsold inventory levels are extremely low – approximately 3500 completed homes as at the end of 2022, or c.3% of the typical annual sales volume.
As such, there is no significant inventory stockpile in our sector, hence we do not anticipate any sharp decline in new-home prices.
Why is inventory so low?
Most of the supply in the market comprises projects offered off-plan, not built. In the context of reduced sales pace, there has been a sharp drop in the volume of programme launches. Developers have cancelled a number of launches to protect their working capital. Given the market is driven by off-plan sales, having developers cancel projects ahead of launch doesn’t negatively impact the sector.
As such, the consequence of a tighter credit market is a consolidation of build programmes, not a surplus of unsold inventory or negative price implications.
2. Government-instructed purchases
The French government has instructed the largest social housing (SH) operators to buy housing programmes off-plan from developers. The number of homes that will be bought by SH operators from developers across 2023 and 2024 is projected to be c.47,000 units per annum.
Average annual sales of new homes are c.100,000 units, and SH operators are expected to purchase c.47,000 units, of which only 3,500 exist as available inventory today. That leaves only c.50% of the average supply available to the rest of the market – or six months’ worth to cover a 12-month period. This government-imposed demand is creating a unique dynamic in the new-home sector.
3. Evolving buyer base
Reflecting point 2, we are witnessing significant change in our end-buyer base. While the market is seeing fewer sales to private individuals, SH operator demand is increasing, as are sales to institutional buyers. Institutional buyers – typically life insurance companies and pension funds – are looking to replace office buildings within their portfolios with residential developments.
We are positioned in a market where supply remains very limited and continually decreasing as demand shifts from private individuals to large institutional buyers.
Our buyer base of life insurance companies and pension funds are eager to invest in new-build programmes in order to avoid the capex commitment associated with purchasing existing building stock that requires extensive modifications to meet energy efficiency regulations. The supply of such buildings is limited, hence we believe we are perfectly positioned within the market.
4. Office to residential opportunity
We anticipate a surge of office buildings, many in prime locations, being sold at attractive price points by institutional owners for redevelopment into residential properties. The occupancy rate of office buildings has decreased significantly with the rise of working from home post-Covid.
Additionally, the implementation of energy efficiency regulations, mandated by French law, has significant capex implications.
These buildings are typically coming to market because of financing issues – either the owner can no longer raise sufficient equity to maintain custody of the asset, or because the banks that finance the buildings impose higher margins or lower loan-to-value ratios.
For some commercial building owners, this combination of low occupation, significant upgrade expenditure and reduced credit availability is causing forced sales.
Click here to learn more about the unique French real estate investment opportunity we are harnessing in Mirabaud Sustainable Cities.
