Market conditions: limited decline in transactions for existing properties… while the new housing segment displays greater weakness
Although the existing property segment has seen a 5% year-on-year decline in volume, it nevertheless remained at historically high levels in 2022 with more than 1.1 million transactions completed in the course of the year. Prices, which continued to display strong annual growth of 6.4% in Q3-2022, testify to the overall buoyancy of this segment but still reflect an imbalance between stagnating prices in major metropolitan areas vs. a faster pace of price increases in other regions, with an 8.1% rise in the provinces. Similarly, the production of home loans (excluding early loan redemptions and renegotiations) has been at a relative standstill since the end of the summer of 2022. While new loans represented monthly totals of between €19bn and €24bn since April 2021, the month of September 2022 saw production levels fall beneath the €18bn mark. But despite the continued downward drift in the 4th quarter of the year, new home loan volumes still remain high in historical terms. Above and beyond this slowdown in new loan production, the difficulties observed in the new housing segment seem more structural in nature and the decline in new housing starts seems to be a more representative metric of overall market conditions than the artificially high level of new building permits.
Households see the market in a more negative light without, however, losing confidence in property ownership
Not since 2019 have households had such a negative opinion of the state of the real estate market. Only 16% believe that now is a good time to buy vs. 44% who think the opposite. This more negative perception does not imply, however, that the French have lost confidence in this sector. A majority of French people continues to believe that prices will rise this year and they rank real estate as their most highly preferred form of investment.
There has been a clear decline in French people’s intentions to buy, irrespective of the type of acquisition, but plans to sell property remain relatively stable.
Interest rates and the Energy Performance Diagnosis: factors driving a change in demand
The sharp rise in home loan interest rates in France has been much less marked than elsewhere in Europe: the gap between French rates and average EU rates, which stood at 20 basis points in October 2021, rose to 89 basis points in October 2022 with fixed rates in France among the lowest available in Europe.
Despite this favored treatment, the increase in interest rates is weighing heavily on the real estate projects of French households. Only one quarter of those who intended to acquire property consider that their plans remain unaffected by the higher interest rates whereas for the others: ¼ abandoned their projects, ¼ postponed them, and ¼ changed their plans. Thus, the rise in interest rates is already affecting French household behavior and changing the dynamics of the real estate market.
The implementation of the constraints induced by the Energy Performance Diagnosis (EPD) is also having a considerable impact on the residential market. A total of 78% of French people think that this diagnosis is playing a major role. Their reaction, for the most part, consists in avoiding the acquisition of F- or G-rated properties. A minority, however, think that this situation may offer them fresh opportunities. It would seem that one third of plans to sell real estate is now influenced by the existence of an F- or G-rated EPD.
Significant drop in transactions, limited decline in prices
The average interest rate on home loans is expected to reach between 3.0% and 3.2% by the end of 2023. If the market sees a return to interest rates last seen in 2014, this would trigger a very significant decline in household solvency despite the extension of loan reimbursement periods (whose average length would tend towards 24 years for the purchase of a primary residence). This would bring reimbursement periods back to the level noted in 2000, thereby wiping out the gains made between 2012 and 2019. It is anticipated that these higher interest rates will first have a negative impact on the number of transactions (which are expected to fall by around 10% in 2023) and subsequently on prices, with a year-on-year decline of 2.5% by the end of 2023, even though increases, on average, are likely to continue in 2023. In conclusion: we see a pattern emerging of higher interest rates leading first to a decline in volumes followed by a subsequent limited impact on prices against a background of inflation where, however, nominal prices are less representative of changes in real estate values, which are expected to suffer a more significant real-term decline
The question of rental property: overview of the rental stock
The private rental housing stock provides accommodation for approximately 7.5 million households in France, i.e., about one quarter of all primary residences. It is the second most commonly observed tenure status, ahead of social housing (5.3 million units). 97% of this housing stock is now owned by individuals. It is consequently highly fragmented and depends on the choices made by an extremely large number of private landlords.
Who are the private landlords?
According to the BPCE/Audirep barometer survey conducted in June 2022, 13% of French people are private landlords, whether they own a rental property alone or in association with others, and let their properties to tenants directly or through a non-trading property company (SCI). These landlords are chiefly members of the middle and upper classes, with an overrepresentation of people aged between 50 and 64. Despite this rather advanced average age, renewal seems guaranteed: many young working people are considering purchasing a property for rental purposes (nearly half of the people in the 18/29-year bracket).
There exists a wide range of rental models. While 62% of landlords own a single property, the rental stock remains concentrated within a smaller group of multi-property owners (3% of landlords own 6 or more properties). The model of letting out small unfurnished apartments is the norm: 67% of landlords let out a one- and/or a two-room apartment. In terms of management methods, half of the landlords deal directly with their tenants, 44% work through a real estate professional, and 10% via the manager of accommodation services (for students, senior citizens, tourists, etc.): it is consequently a largely intermediated market.
Strategies and typology of landlords
An analysis of the motivations and selection criteria adopted by landlords reveals three strategies:
- Rental income and asset building (38%). These landlords manage to generate income from their rental investments because they have been investing for several years and often own multiple properties. Most of their asset strategy is related to the ownership of rental property.
- Tax optimization and diversification (29%). A rental property is perceived, above all, as an asset designed to generate a return over the long term, which is more likely to materialize when the property is resold than through the collection of rent that barely covers expenses. People aged 50 to 64, who are subject to greater fiscal pressure after their children have left home, are overrepresented in this group. Property management is generally left in the hands of professionals.
- Use value and attachment (33%). The origin of the property in question is chiefly inheritance or donation. The decision to let the property enables the owner to retain possession of a property to which they are attached, to be used by themselves or by their loved ones. The aim is less to optimize returns than to cover costs. Difficulties with tenants are more frequent, as these rentals frequently involve a high turnover.
These strategies are not mutually exclusive: they reflect the fact that private landlords share a pursuit of long-term objectives, their investment strategies express their desire to secure the future and their fundamental faith in the advantages of property ownership.
However, the advantages of rental real estate are offset by the risks inherent in this type of investment which, ultimately, is in a category of its own. Rental property is not only an asset with a value and a rate of return but also a piece of physical property (and enjoying only relative liquidity) and an asset with a human dimension, with all the risks that this entails. In the hierarchy of risks associated with rental investment, difficulties with tenants come first, followed by regulatory constraints and taxation, with public policy playing a decisive role in assessing the advisability of pursuing an investment operation.
The question of energy renovation
There exist 1.6 million ‘thermal sieves’ in the private rental housing stock, i.e. 9% with a G-rated EPD and 11% with an EPD rated F. The ban on renting out these units as of January 1, 2025 and January 1, 2028 respectively lends a certain urgency to this question. Nearly one half of landlords and more than 80% of tenants, however, are unaware of the EPD rating of their accommodation, and when landlords claim to know this EPD rating, they clearly overestimate their properties’ energy performance.
The landlords understand what is at stake: in addition to the regulatory constraints, they associate the availability of state support measures with future gains regarding the value of their property and their relationship with their tenants. But the intentions to carry out energy renovation work concern only 32% of the (generally younger) landlords within a 5-year horizon and the support measures only address the financial dimension of the obstacles to investment. Assuming that these issues are overcome, other obstacles – either of a practical nature (presence of the tenant in the premises, negotiation and agreement to be obtained from condominium co-owners for large-scale work concerning 1.2 million multi-family units) or of a nature related to the quality of the offer (uncertainty about the cost/benefit ratio, lack of expertise, difficulty in finding competent and reliable craftsmen, etc.) – are more difficult to overcome because they confront the landlords with an offer that remains ill adapted to quantitative needs and qualitative expectations.
If the timetable is not adjusted, the private rental sector is likely to enter a period of uncertainty – or even one of confrontation – that could put an even greater strain on the tenant/landlord relationship.