While INSEE had initially forecast growth of 0.3% in Q2 2016, GDP fell (-0.1%) for the first time since 2014, surprising most economic observers. Some claim that the French economy is drawing to a halt, while others see this decline as a simple bad patch following a particularly active start to the year (+0.7% of growth over Q1).
The main driver of growth, household consumption, remained stable over the last three months (0.0%) following a 1.7% upturn over Q1. The same applied to corporate investments which slowed as expected over Q2 following a marked increase at the beginning of the year with the government incentive allowing for additional depreciation initially planned to end on 14 April 2016 before being extended to 14 April 2017. Output, which fell by 0.2%, was also affected by social action against employment laws in May and June.
Another bad surprise was unemployment which, after an encouraging start to the year, posted one of its largest increases of the last 5 years in August (+1.4% in one month) resulting in an additional 50,200 category A job seekers. Even so, the year-on-year unemployment rate still posted a 0.5-point decrease to 9.6% in mainland France in Q2 2016.
Paradoxically, the business climate, which has been above its long-term average for over a year, posted a slight improvement over September reaching 102 points. The retail trade fell by 1 point (from 103 to 102), whereas services and industry gained 1 point and 2 points respectively. The French PMI Market index is also positive and came out at 53.3 for September compared with 51.9 in August. Despite this, INSEE's turning point indicator still shows economic uncertainty.
In spite of this summer dip, the government, based on good figures for the Business Climate and the PMI Markit index as well as an increase in householder confidence, is maintaining its growth forecast for 2016 at 1.5%; this is more optimistic than forecasts from the Banque de France (1.4%) and INSEE, which has recently revised down its forecast to 1.3%. The government's forecast would need growth to be at least 0.5% over Q3 and Q4, a level that will be difficult to achieve according to many market observers.
2015 was a distinctive year, mainly due to exceptional performance over H2 2015. 2016 is following the same trend with a 26% increase in volume compared with the ten-year average. The last quarter also looks to be active as several major transactions are due to be completed over the coming weeks which should take the overall volume to over 260,000 sq m.
2016 is therefore already successful and it remains to be seen what will happen in 2017. Major political events are unlikely to influence activity in the Lyon market. After further consolidation of market fundamentals, we can expect 2017 to follow the same trend. (Out)performance will depend on the volume of major projects.
The number of new office deliveries has been limited this year with less than 75,000 sq m of office space due to be completed in Lyon, almost half of this space has already been let. 2017 will be a welcome year with numerous completions scheduled which will boost the Lyon office stock to over 6,000,000 sq m.
Prime rental values remain broadly stable with adjustments applied in some areas. Market conditions remain balanced. Leeway in negotiations remains a key lever, although with strong variations depending on the district and the building type. Rents are not expected to increase over the near future or until additional prime supply comes onto the market; this type of space is currently at the project stage.
In the national context, the Lyon market stands out as an active and attractive area in terms of economics which, combined with a favourable investment climate, has enabled the Lyon market to remain a market of choice as recognised by investors.
The market may remain active with a rising number of transactions recorded, but volumes are clearly falling and should reach €800 million by the end of the year. Performance or any decline will largely depend on whether the best quality assets across all product types come onto the market. Demand remains strong and all the market now needs is for landlords to make the decision to sell.
Several new projects have already submitted applications for building permits and should attract investor interest. The City of Lyon remains a recognised and liquid market for national and international purchasers, even though the latter have been discreet since the beginning of the year. On a positive note, as the vast majority of activity in this market is attributable to domestic players, the Lyon market has relatively little exposure to any fall in demand linked to Brexit.
Finally, the lack of so-called "classic" product will keep yields under pressure.
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