Limited upward movement in Paris prime retail rents - Capital Economics
European Commercial Property

Limited upward movement in Paris prime retail rents

European Commercial Property Update
Written by Gabriella Dickens

While Paris prime retail rents rose in 2018, we doubt this marks the start of a prolonged upward trend. With tourist flows set to stagnate due to a weak global economy, rents will not rise by much before 2023, but the continued attraction of Europe’s premier retail street should prevent rents from falling.

  • While Paris prime retail rents rose in 2018, we doubt this marks the start of a prolonged upward trend. With tourist flows set to stagnate due to a weak global economy, rents will not rise by much before 2023, but the continued attraction of Europe’s premier retail street should prevent rents from falling.
  • After several years where prime Paris retail rents failed to rise at all, there was a resurgence in 2018 – rents grew by 5.6% y/y to reach €13,992/sqm/year. However, they have stalled since the middle of 2018. So, was the rise in H1 2018 just a one-off?
  • In the past, several factors have tended to drive higher rents in the French capital’s retail sector, including strong consumer demand, a healthy tourist sector and structural change. (See our Focus.) However, rents rose in 2018 despite national consumer spending growth easing to 1% y/y. And between 2014 and 2017, rents were flat, even with consumption growth in France averaging a reasonably solid 1.7% y/y. So, while there was a clear link between consumer demand and prime rents prior to 2014, it has since broken down.
  • Instead, we think that the tourist sector has played a larger role. After all, spending by tourists is equivalent to around 10% of total spending, and a large part of that will have occurred in Paris, so it makes sense that rents are affected by the health of tourism. Indeed, the number of nights spent in Paris hotels fell by around 4% on average between 2014 and 2016, before rising by 12% in 2017 and 5% in 2018. What’s more, rental growth is particularly sensitive to ‘high-spending’ tourists from China, Japan, Russia and the Middle East, whose average spend according to the Paris tourism office is around €190 per day compared to visitors from Europe and the US who spend €130 per day on average.
  • With the global economy faltering, tourist numbers from these ‘high-spending’ regions are unlikely to rise much over the next couple of years. Our weighted measure of GDP from these regions at best points to sluggish growth in tourist flows. (See Chart 1.) While we do expect rents to edge higher in H2 of this year, beyond that, weaker tourist numbers will weigh on further increases.
  • However, with a fixed supply of units in prime locations, and high and resilient footfall, we doubt prime rents will fall either. Indeed, anecdotal evidence suggests retailers are expanding their search away from the Champs-Élysées to other popular locations such as Avenue Montaigne. It is important to note, though, that while restricted supply means rents are unlikely to fall, it also limits the number of transactions, so rental growth of 0% may just reflect the fact that units haven’t changed hands.
  • All in all, we expect rental value growth to fall back to 0% in 2020, from around 4% y/y after some recovery in H2 2019. But with tourist volumes set to increase in line with a pick-up in growth in the ‘high-spending’ regions after 2022, we expect rents will be rising again in 2023. (See Chart 2.)

Chart 1: ‘High-Spender’ GDP & Hotel Nights (% y/y)

Chart 2: Paris Prime Retail Rents (%y/y)

Sources: Paris Tourist Office, Refinitiv, Capital Economics

Sources: Various Agents, Capital Economics


Gabriella Dickens, Assistant Economist, 020 3974 7421, gabriella.dickens@capitaleconomics.com