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01 Nov 2006

The future of immobilier in the Paris property market

The other day I was chatting to an acquaintance who has travelled to some 70-odd Paris Propertycountries in the world. For him, Paris is the second most beautiful city in the world, after Cartagena in Colombia. Now, take that into account along with the statistic that France is the top tourist destination in the world and Paris is in the top five city destinations. Visitors come to experience the style, haute couture, romance and culture so it’s hardly surprising that the French & Parisian property markets have experienced a huge growth in recent years – over 70% since the last “trough” of 1997.

Yet according to the conclusions of a June 2005 report by the French Economic Situation Observatory, this growth is not related to a “speculative phenomenon” and thus not a classic property bubble as seen in the early nineties and currently in many world markets.  Whilst prices have certainly been buoyed by foreign buyers, the property market has essentially been driven by private households.  For the Observatory this means that these households, willing to indebt themselves to acquire a property, will have committed to monthly payments and fixed interest rates. A shift in prices and a rise in ECB bank rates (as is beginning to happen) will not compromise their solvability as lead to a sales rush with buyers taking a long-term approach. As these buyers did not buy to realise a short-term capital gain, they will not sell, even if the market drops.  According to a Banque de France report, for buyer interest to decline to the same extent as 1991, there would have to be an increase of mortgage rates by 300 base points and an 30% increase in house prices. So apparently no big bust and yet the forums are buzzing with theories from those predicting one and those who forecast a gentle landing.

Even so, banks, which are the most at risk, are starting to protect themselves more and more.  Increasingly we are seeing the scenario of a property being put back on the market again as a result of lack of bank mortgage approval for the hopeful buyers. The time-to-sale is taking longer and some apartment prices have even been lowered – sellers can no longer overvalue their property. Key areas which once stirred up frenzy amongst foreign buyers, such as the Rue Montorgueil, are now experiencing a slight slump, take the case of a large 62 m2 apartment in Rue Montorgueil that couldn’t find a buyer at 440,000€. This turnaround is starting to give buyers an opportunity for negotiation.

So is it prudent to buy now when interest rates are starting to rise and the market is starting to slow?

Obviously this primarily depends on your motivations and financing. A buy-to-sell approach is clearly not advisable – best left to those who bought in the late nineties or early 2000, where a typical 37m² apartment bought for the equivalent of 90,000€ in 1999 and could theoretically sell now for 250,000€. Buy-to-let on the other hand can be a fairly sound investment as many believe that despite a future drop in property prices, rental prices will remain high, such is the demand for housing in Paris. Dependent on area, buyers can easily command fairly profitable rental yields and at the same time be sure of reliable occupants. In general a 50m² apartment (most sought after by Parisian renters) can fetch between 1000€ and 1500€ per month.Le Point Magazine According to “Le Point” magazine, those with a lot more in their pockets (minimum 460,000€), it’s definitely worth considering an LMP (Loueur de Meublés Professionnel). Loosely translated as a fully-furnished property aimed at professional renters, these contracts are highly sought after by footballers, celebrities and surgeons alike! As an investor you would buy a fully-furnished lot in a student residence, luxury building or retirement home, a company then manages the entire rental scheme and pays the investor a pre-defined rental income. This process requires registration at the local Commerce Register in order to gain the “professional” status. The main benefit of LMPers are the tax advantages; VAT refund, option to reduce taxes to zero in the first year, rental income that is non-taxable, exemption from ‘professional’ capital gains after 5 years. The investment must generate an annual rental yield of at least 23,000 € in order to qualify for these tax benefits.

These types of residences should be well-situated i.e. not too far from the city centre with proximity to universities as well. Buyers should be vigilant about service charges; catering and housekeeping charges which can easily turn into a black hole.. The best bet is to work with well-known and reputable professionals such as Les Lauréades, Gestrim, Réside Etudes or Orpea, GPD for retirement homes. With the advent of an ageing population, retirement homes in particular may be a future valuable investment.

A pied-à-terre for those romantic or cultural weekends away is another possible option, although be aware that the smaller the apartment or studio, the higher the cost per m².  If the area is a high priority, then there are still some bargains to be had.  That is the beauty of Paris - its comprehensive regeneration programme can make it worthwhile buying in an area that is not necessarily desirable today. The downside is one should be prepared for a long wait before seeing substantial changes.

Return tomorrow for Part 2 of our Paris property focus and where and what Paris property to buy.

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