Brexit is good ! (for French office REITs)
This market comment should not be regarded as an investment recommandation. See disclaimer below.
Brexit has been widely seen as a major negative event for the European economy. The recent fall of share prices in Continental Europe suggests French REITs will be negatively impacted. On the contrary, we believe this could be a very good piece of news for the French Office REITs.
Stronger French investment market
Greater Paris remains the first European office market in term of sq.m and the second in value to Greater London. We believe the current uncertainty could lead international investors to increase the weight of French offices in their portfolio given the likely higher volatility of the British pound and risks of a lower office demand in London (see below). The current gradual recovery of the French economy and the excellent transparency of the French office investment market (probably the best in Continental Europe) are also strong magnets. As already seen in the past days, Central Banks have made significant amount of cash available to banks in order to prevent a banking crisis. These liquidities should also help financing the investments (see below for more on cost of financing). As prime cap rates are reaching 3%, one should not expect a huge drop in office yields but Brexit could help a further decrease and, at the very least help a medium term stabilization of yields at low levels. This is positive for NAVs.
Stronger Paris letting market
Thanks to an efficient and dense public transportation network and a highly qualified workforce, Greater Paris is an attractive location for employers and headquarters. Even though the competition is strong with several German cities, we believe some companies could relocate to Continental Europe and in Paris in particular. We believe that a part of the significant French population located in London could move to Paris. Major business districts such as La Défense, CBD or eastern CBD for New Tech companies should benefit from this possible relocation. Take-up This would drive demand and rents up at a time when there is a scarcity of new office buildings in the area and vacancy is already low in the CBD (4.3% at end Q1-16). This is good news for like-for-like rental growth of Paris offices.
Lower cost of financing
A likely weakness of the British Pound should drive bond investors to Continental Europe. Hence, Germany and France could benefit from even lower cost of financing and longer maturity (the French 10Y sovereign bond "OAT 10 ans" reached its historical low at 0.29% on Monday 27 2016). This is good new for French REITs whose business models include LTV above 30%. The ongoing decrease of the average cost of debt of French REITs would continue driving CFps up.
Stronger market place, better valuations ?
The merger of Deutsche Borse and LSE was very bad news for the French market place. The strength of a market place is a very significant factor of fair valuation of the stocks as the close vicinity of investors, analysts and listed companies favours a better understanding. The Brexit could postpone or lead to the cancellation of the merger which is still under scrutinity of the European Commission (even though Deutsche Borse and LSE representative have already said that the merger would go on). In any case, the Brexit shopuld not make things worse for companies listed in France.
Full impact of Brexit is unlikely
Even though political analysis is not the core business of Tanagra Advisory, we believe that UK authorities will do their best to minimize the impact of the Brexit (or even will not exit at all) which means that the impact would be negligible. The worst case for UK (i.e. a full exit) would have a positive impact for French Office REITs as shown above. In any case, there is no reason for the recent fall in share prices...
For more details, please contact us.
Disclaimer regarding this market comment
Risk warning
Tanagra Advisory shall not be responsible for any loss arising from any investment based on this general market comment which include no investment recommandation. The contents of this comment should not be construed as an express or implied promise, guarantee or implication by Tanagra Advisory that clients will profit from the comment herein or that losses in connection therewith can or will be limited.
Sources of information
Tanagra Advisory utilises financial information providers and information from such providers may form the basis for an analysis. Tanagra Advisory accepts no responsibility for the accuracy or completeness of any information herein contained.
Expiration and update of recommendations
This market comment validity may expire promptly due to market volatility and newsflow. In general, Tanagra Advisory does not anticipate its comments to be valid for more than one to five days. Any assumptions on which this market comment is based may be subject to uncertainty and a breach of any of these assumptions may result in the expiry of the validity of this market comment.
Conflict of interest
Tanagra Advisory, its employees and related legal persons may have, establish, change or cease to have positions in securities, foreign exchange or other financial instruments related to this market comment.
Supervision
Tanagra Advisory is a consulting firm which provides no investment recommandation in its public market comment. The CEO of Tanagra Advisory (Bruno Duclos) is a Certified French Stock Exchange professionnal ("Certification AMF") and a member of the French Financial Analysts Society ("SFAF") and follows the Society best practice rules.
