France Real Estate Report Q1 2013

The France Real Estate report examines the commercial office, retail, industrial and constructionsegments throughout the country in the context of continuing economic struggles.

Covering the entire country, with a data focus on the principal cities of Paris, Nice and Marseille, thereport covers rental market performance in terms of rates and yields over the past 18 months andexamines how best to maximise returns in the commercial real estate market, while minimisinginvestment risk and exploring the impact of the eurozone crisis on a market already characterised byrelative stagnation.

In general, prevailing economic sentiment in France remains subdued as consumers cut spending in theface of slow growth, high unemployment and austerity measures. A US$25bn package of tax increasesand spending cuts for 2012 and 2013 failed to defend France's AAA credit rating. As a result, despitecertain bright spots such as high-end retail, we maintain a bearish outlook for France's commercial realestate sector.

Key Points

After four consecutive years of contraction in the French construction industry between 2008and 2011, the sector is showing signs of a strong rebound in 2012. Industry figures for H112indicate that the construction industry value grew a robust 5.7% year-on-year (y-o-y) (in nominalterms) during the first half of 2012 - this is significantly better than our earlier forecast, whichanticipated 1.2% y-o-y growth for 2012 as a whole.

The protracted resolution of the eurozone sovereign debt crisis continues to weigh on domesticeconomic activity, with leading indicators now pointing towards stagnant growth for the last twoquarters of 2012, and no suggestions that a robust recovery in 2013 will be forthcoming. Whiledomestic pressure is mounting on President Francois Hollande to restore economic growth toFrance, policy-making to date has lacked a clear direction and done little to target growth ortackle any of France's structural imbalances. On its current trajectory, we do not expect thecurrent policy mix to prove conducive to stimulating economic activity. Third party forecasts forgrowth have now shifted strongly towards our expectations for real GDP growth in 2012 to beweak, with the Bloomberg consensus currently standing at 0.1% for 2012 and 0.5% for 2013,compared with our forecasts of -0.2% and 0.6%, respectively.

We remain bearish on the European building materials market as conditions for firms continue todeteriorate in light of ongoing eurozone austerity. The sovereign debt crisis, lower domesticdemand from peripheral countries and tighter financing conditions are constraining ourconstruction outlook for the region, and will continue to limit growth for the foreseeable future.Overcapacity, increasing production costs and falling sales volumes have hit the bottom lines ofproducers since 2009, and we see no immediate end to these phenomena. Notable exceptions tothis trend are Russia and, to a lesser extent, Turkey and we expect these outperforming marketsto sustain high levels of demand over the medium term.