Cromwell’s Head of France, Andrew Stacey, has 35 years’ commercial property experience and a strong background in developing and managing logistics assets. We talked to Andrew to discuss the French real estate market, the challenges posed by COVID-19 and what lies ahead.

Cromwell France overview

Could you provide an overview of the French market?

France is a large market. It is consistently in Europe’s top three for investment activity, behind Germany and the United Kingdom in terms of capital volumes. France is also a very established market with a rich history and strong legal system, the latter of which was set up under Napoleon and is still presently guided by the Napoleonic Code.

The Code sets out clear guidelines and structures on how to buy and sell. There is also the system of notaries, effectively government lawyers, working impartially for the state who oversee all transactions. From a foreign investor’s point of view, this makes France a relatively straightforward and process-driven market, particularly when compared to some other countries.

France has a strong manufacturing base and large IT, logistics and retail sectors. Much like Germany and the UK, it’s a full-sector market with substantial occupier and tenant-customer depth.

As France is geographically one of the larger countries in Europe, there are multiple investment destinations. The main cities run north to south along the spine of the country, starting in the north with Lille, down to Paris, Lyon and then on to Marseille on the south coast. There are others but that is the main backbone in which most of the investment transactions across all sectors occur.

Paris is unsurprisingly the largest of these markets, accounting for around 70% of all transactions in France. It’s also where the majority of the portfolio we manage is located, so it makes sense for Cromwell’s French team to be based there. We may also look to explore for more opportunities in Lyon, France’s second biggest market, in the near future.

France 2019 investment activity

Have you seen any adverse effects as a result of COVID-19?

At the moment there is a shortage of good assets, particularly prime logistics, office and retail stock. Retail has undoubtedly taken the greatest hit overall, to the point we are now asking how the fundamentals will change. What will the sector look like moving forward and how will the current stock be integrated into this? Will e-commerce take over?

I think e-commerce will have a major impact on France, but this isn’t the case everywhere. If you look at Poland, for example, the shopping centres are places where people go. It’s more experiential and a destination, particularly during winter when it’s cold and people want to get out of the house.

Perhaps France will see some existing shopping centres transition to e-commerce distribution points while others will evolve, repositioning themselves as destination centres offering more than just shops. They may be converted to a mix of residential and co-working, or live/work space. This was a trend prior to COVID-19 but it ‘stopped’ with the lockdowns. However, when things begin to go back to ‘normal’, there may be a longer-term uptick in demand for this type of space as employees seek greater freedom to work, and live, remotely.

Prior to COVID-19, there wasn’t massive oversupply of office space with vacancy across the Greater Paris region just shy of 5.0%, which was positive. However, the market has obviously been impacted and although there are tenants downsizing their office space in Central Paris, there are others who are taking the opportunity to move in from the suburbs, looking to secure well-located assets near infrastructure nodes.

Values will likely still be impacted which will have a knock-on effect on the debt market. How the banks will react to this is especially important. They are going to have to look even more closely at the tenants and the quality of their covenants. It’s no longer just a case of location, location, location.

What’s been happening with leases and tenants?

At the start of COVID-19, we looked at all 249 of our French tenant-customers to understand who were the most susceptible to the virus. We have been dealing with plenty of rent relief requests, and our approach has largely been to grant rental deferrals in return for longer lease terms.

Our asset management team is also doing a brilliant job of getting leases signed, largely for light industrial assets, and importantly with rental values still at, and in a lot of cases above, pre-COVID-19 levels.

What sectors are of interest?

Prior to COVID-19, our portfolio was biased towards light industrial and logistics. We had just begun to look at prime office space in the Paris and Lyon regions but there was a shortage of quality stock. We will continue to monitor the markets and assess where we stand in the next six months to a year perhaps with a narrowing of focus towards the capital.

We have turned our attention to buildings we can refurbish which requires a longer-term view, but there are more of these off-market opportunities compared to prime office assets.

My background is in logistics, a sector I’ve been involved in for over 30 years. At the moment, logistics assets are extremely popular, but people who are inexperienced in the sector are paying unrealistic prices for poor quality assets. This is not something we will be doing, I would like to say that experience counts!

What type of investors are most active at the moment?

Domestically, French institutions were active prior to COVID-19, particularly regarding prime office space. They were agile and quick to act, with very little debt. These institutional investors are still out there but they are more hesitant, as their attitude towards the office sector is ‘wait and see’. As the impact of COVID-19 continues to unfold over the next six to 12 months, so too will the effect on the office market, which will be dictated by the extent to which people embrace the working from home trend across France.

Our position is that there still needs to be a base for people to work from and that’s why the office is here to stay. How it will look will change as working from home becomes more prevalent, but to maintain a company’s culture and sense of community, the office is vital, let alone for harnessing creativity and pushing ideas forward.

Private equity is also circling, as are pension funds, both with a lot of capital to deploy. As a result, prices in the logistics sector are actually shifting upwards because of the levels of demand. In terms of overseas investors, Korean buyers remain interested, as is US capital. However, due to travel restrictions, there is only so much they are able to do via video conferencing.

This is the third recession of my career, and I’ve found that often you can make more money in a poor market than a good one. There are a lot of people out there waiting to see what happens next. They are effectively waiting it out for now and not, I believe, capitalising on some good opportunities.

What’s in store for 2021?

It’s an exciting time for Cromwell in France. We officially moved into a beautiful new office, but a large percentage of us are now working from home! I think that is a good incentive for the team to come back and work from the office once it’s safe to do so.

We have a great investment team and there are some very good opportunities in the market. We are, of course, extremely careful with what we buy, as well as with ensuring the tenant-customer is resilient, has stability and can remain in the asset for their entire lease term.

In terms of new sectors, we’re always looking at what is available, but at the moment we’re focusing on what we’re familiar with, which is select office opportunities and light industrial and logistics

assets. Despite COVID-19, I’m incredibly positive about future opportunities and 2021 in particular.

What keeps you busy outside of work?

I’m a keen cyclist, and proudly ride regularly in my Cromwell cycling kit. I’m also rebuilding some old buildings opposite my house in Burgundy with the goal of turning them into gîtes, which are holiday homes for rent. The two buildings were initially built in 1740 out of stone, and my aim is to convert them into accommodation for up to 20 people. The idea is to get people who like cycling to come down, and I can introduce them to some excellent, quiet roads as well as good food and wine!

Andrew Stacey gites