The Role and Behaviour of Commercial Property Investors ... · PDF fileThe Role and Behaviour...

The Role and Behaviour of CommercialProperty Investors and Developers inFrench Urban Regeneration: The Experienceof the Paris Region

Ingrid Nappi-Choulet

[Paper first received, October 2004; in final form, October 2005]

Summary. This paper provides an analysis of the factors underlying private investment decisionsconcerning property development, with specific reference to urban regeneration in the Frenchcontext. It is based on the results of a behavioural survey and MCA analysis of the behaviourpatterns and motivations of active private investors and developers in the French commercialproperty markets and their involvement in French urban regeneration initiatives. The pattern ofinvestment and development activity over the 1997–2002 French property market recoveryperiod has been studied and a typology of actors set up, based on their investment policy forthese property markets. The findings indicate that property investors in urban regenerationessentially seek speculative developments and short-term investments.

1. Introduction

This paper analyses the behaviour patterns

and motivations of active private investors

and developers in the French commercial

property markets and their involvement in

urban regeneration initiatives. We have

studied the pattern of investment and develop-

ment activity during the Paris region’s prop-

erty market recovery period from 1997 to

2002 and have set up a typology of actors

based on their investment policy for these

property markets. The original research

comprises a comprehensive report funded by

the Caisse des Depots et Consignations—

Direction du Renouvellement Urban (Urban

Regeneration Department)—on a survey of

private-sector commercial property investors

and private developers and their primarydeterminants for participating in urban re-generation initiatives in the Paris region.

Urban regeneration in France has beenactively encouraged by the French govern-ment and the French Ministry of UrbanAffairs over the past decade. In 1999, theFrench government demonstrated its prioritiesfor urban regeneration initiatives by setting up247 contrats de ville (urban developmentagreements, literally ‘city contracts’), con-cerning more than 1500 neighbourhoods andover 1 million housing units in France.Under this framework, 50 major projects toredevelop deprived urban sites have beencreated. Like other former industrial ordeprived sites, the northern and eastern partsof the Paris region are targets for these

Urban Studies, Vol. 43, No. 9, 1511–1535, August 2006

Ingrid Nappi-Choulet is in the Real Estate and Urban Planning Department, ESSEC Business School, Avenue Bernard Hirsch—BP105, F-95021—Cergy Pointoise Cedex, France. Fax:þ33 1 34 43 30 01. E-mail: [email protected]. This paper is based on work under-taken for a research project which examines the involvement of private-sector investors in urban regeneration, funded by the Caissedes Depots et Consignations, Direction du Renouvellement Urbain in Paris. The author is grateful for the CDC’s support (SylvieHarburger). Special thanks to Marion Cancel for her valuable research assistance in this project.

0042-0980 Print=1360-063X Online=06=091511–25 # 2006 The Editors of Urban Studies

DOI: 10.1080=00420980600831692

http://usj.sagepub.com/

initiatives at a time when the commercialproperty investment market has becomehighly active in the Paris region after a longrecession, changing in nature and attractingnew types of international investors.

Analysis by Adair et al. (2003) has shownthat institutional funds are reluctant to investin regeneration areas in spite of the govern-ment and public agencies’ desire to increaseinstitutional involvement and attract privatefinance to regeneration. The case of the re-development of the Saint Denis plain, pre-sented in this paper, supplies an interestingexample of private investment and involve-ment in an urban regeneration initiative inan inner suburb of Paris. The site has beenlargely concerned with new property develop-ments in recent years and has successfullyturned itself into a new business district forthe greater Paris region. Most of the newoffice buildings have been developed on aspeculative basis, bought by large propertyfunds.

The objective of this paper is to examinethe determinants of private-sector involve-ment in commercial property investment anddevelopment in general, and specifically inurban regeneration in the context ofbooming property markets. The studyfocuses exclusively on office space, shoppingcentres and business centres. Using a beha-vioural survey conducted across 34 large com-mercial property developers and investors inthe Paris region, the study uses the multiplecorrespondence analysis (MCA) technique toexamine key factors of property investmentand urban regeneration involvement.

The paper is structured as follows. Section2 reviews the relevant literature and currentresearch examining the issue of urban re-generation, with particular reference toprivate-sector property investment decisions.The third section presents the context of thesurvey, paying particular attention to thedevelopment of the property investmentmarket in France and the implementation ofthe urban regeneration project in the SaintDenis plain area, in an inner suburb of Paris.The methodology of the behavioural surveyand the MCA analysis is presented in section

4, while the results and the motivationsfor urban regeneration involvement are pre-sented in section 5. Section 6 contains ourconclusions.

2. Property Development Investment andUrban Regeneration: A Review of theLiterature

Urban regeneration has been defined as

the process of reversing economic, socialand physical decay in our towns and citieswhere it has reached that stage whenmarket forces alone will not suffice (Adairet al., 1999, p. 2031).

Over the past two decades, there has beenextensive literature examining the issue ofurban regeneration, especially in the UK. Asubstream of this literature, concerningproperty-led regeneration through the finan-cing of urban regeneration and the leveringof private-sector investments, studies what isone of the major urban policy issues to haveemerged since the early 1980s. Healey et al.(1992) and Berry et al. (1993) stress that suc-cessful regeneration requires real estate prop-erty developments. However, authors alwayspoint out that little knowledge is available ofthe nature of private-sector investment andthe strategy employed in the urban regener-ation initiatives (Adair et al., 2003). Generalproperty investment principles, on the otherhand, with analyses of the motivations under-lying private-sector investment in general,have been widely presented and studied inrecent decades in both academic real estatefinance journals and many textbooks. Thelinks between these two main issues—urbanregeneration and real estate investmentprinciples—merit further attention in urbanstudies.

2.1 Property Investment Patterns

Economic literature concerning propertyinvestment patterns has been abundant in theUS and the UK, particularly as propertymarkets in these countries have expandedand become global in recent years.

1512 INGRID NAPPI-CHOULET


Much of the research on commercial prop-erty has tended to focus on real estate as aninvestment asset and has thus been con-cerned with rent and capital value determi-nation, market performance and the role ofproperty in a mixed asset portfolio (Lizieri,2003, p. 1151).

It is usually emphasised that real estate asan asset offers the potential for relativelyhigh rates of return on invested capital,aided considerably by financial leverage, andprovides both value appreciation and protec-tion against inflation. But it also comes witha degree of risk, due mainly to illiquidity,including the possibilities of loss of incomeor capital (Floyd and Allen, 1994; Brownand Matysiak, 2000; Jaffe and Sirmans,1986). Many techniques have been developedover the years in this literature for analysingreal estate investment projects in a decision-making framework. Most of these techniquesemphasise that leverage and risk remainimportant factors in property investment; thekey criteria in decision-making are risk,expected return and diversification benefits.The internal rate of return (IRR) is one ofthe most common indicators used to evaluatethe performance of an investment. It isdefined as the discount rate that makes thenet present value of the expected incomeequal to zero. Therefore, the IRR measuresthe yield of the investment, calculated basedon the period of property investment. TheIRR is then compared with the investor’srequired rate of return and, if the IRRexceeds this required rate of return, thedecision is to invest. Compared with more tra-ditional appraisal methods used to evaluateinvestment projects, such as the traditionalreturn on investment criteria, which isexpressed as the average annual profit as apercentage of the average annual investment,this indicator uses all the cash flows in aproject and takes account of the time valueof money (see more details in Brown andMatysiak, 2000).

As property investment is opportunity-driven, it needs to offer returns reflecting therisk-level and risk-reward profiles of

investments. Because physical propertyinvestments are illiquid and there is a greatdegree of uncertainty about the various prop-erty market cycles, the target rate of returnrequired to undertake a property investmentshould include a premium for bearing risk.Greater uncertainty translates into a higher-risk premium, reflecting the psychologicalpreference for safe investment decision-making. Urban regeneration involvement isthus particularly interesting in this respect.As the process is typically very long-termand involves large amounts of money, therisks are usually large. Developers and inves-tors thus need an appropriate return rate tocompensate for the risks and the immobilis-ation of their capital. They will put moneyinto the project because they believe the prop-erty will ultimately yield substantial cashflows and capital appreciation.

These returns can be enhanced by takingadvantage of market cycles while at thesame time diversifying risk. Generally, themost secure investments place the emphasison current income production—i.e. cashflows, from blue-chip tenants. Speculativeinvestments, in contrast, are usually enteredinto without any tenants and the emphasis ison the appreciation potential of future develop-ments. In this case, expected property appreci-ation and capital structure are determinants forinvestment: the greater the proportion of debt,the higher the equity appreciation investorscan anticipate. As underlined in most propertyinvestment textbooks, the real estate industryfrequently uses the terms ‘positive leverage’and ‘negative leverage’ to describe theeffects of debt on cash returns. Positiveleverage simply means that property cashflows are greater than the interest ratepaid on debt. This leverage is essentialbecause it increases current equity return andmakes property investment very attractive(Linneman, 2004).

This factor is an important driver for newproperty developments. As we see from oursurvey and in the Saint Denis plain examplepresented below, the Paris region commercialproperty market has been a good example ofpositive leverage, with low interest rates and

THE COMMERCIAL PROPERTY MARKET IN FRANCE 1513


substantial capital appreciation during the1997–2002 period.

2.2 Property Development and UrbanRegeneration

Over the past two decades, property-led urbanregeneration has been a popular topic ofresearch in urban studies, notably in the UK.Fuelled by Britain’s property-led develop-ment initiatives in its urban regenerationpolicy of the mid 1980s, much of the literaturefocuses on public/private sector partnership,stressing the importance of private-sectorinvolvement in urban regeneration. Jones(1996), for example, has analysed the natureof the property-development decision-making process and has commented on theattraction of private capital in urban regener-ation initiatives and the logic of public-sector financial contribution to this process.As development profits are highly geared tothe level of final market values and hence tothe property-market cycle, he suggests thatgrant-aid programmes to developers are effec-tive at the beginning of an upturn in the prop-erty cycle, but that they are unlikely to besuccessful regeneration vehicles in a reces-sion. He points out that the possibility ofsupernormal profits depends on the macro-property-market cycle. This is a particularlyimportant conclusion.

More recently, some British literature hasexamined the issue of urban regenerationwith research focusing on private-sectordecisions. Much of this literature has concen-trated on institutional investors’ motives forholding regeneration investments. The mostextensive work on this issue is by Adairet al. (1998, 1999, 2003) and McGreal et al.(2000) who have studied the role of private-sector investment, and the perception andhandling of risk in urban regeneration,through investor surveys with a sample sizeof around 100 respondents in the UK.

In an examination of decision-making cri-teria and investors’ motivations for holdingproperty investment portfolios, Adair et al.(1999) stress that the investment decision isdominated by considerations relating to

perceived return, the security of investmentsand the spreading of risk. The conclusions oftheir research show that perceived totalreturn is the primary incentive for holding acurrent portfolio of urban regeneration invest-ments. Urban regeneration investors see-mingly take a long-term perspective in theiranticipation of future capital appreciation.Another recent study, by McGreal et al.(2000), points out that companies retain theirinvestments in urban regeneration locationsin expectation of accumulating above-average returns. Other factors, such as newbusiness opportunities and exit strategies, areperceived as significant in urban regenerationinvestment motives. Rental growth arisingfrom occupier demand and capital appreci-ation reflecting investor demand are theprimary criteria for evaluating new regener-ation projects, according to McGreal et al.Similarly, lack of or low capital appreciationdue to weak investor demand is a strong disin-centive to investing in urban regeneration.According to these authors, the factorsperceived as improving the flow of private-sector finance into urban regeneration aredominated by non-finance-based instruments,such as the flexibility and the clarity of theprocedures, land contamination remediationor a guaranteed minimum of infrastructure.

More recently, Adair et al. (2003) havebenchmarked the investment performance ofregeneration property. They note that, overthe long-term perspective, returns for regener-ation property can outperform national andlocal benchmarks and that regeneration areasoffer significant investment opportunities anda high return on investment. Of the differenttypes of properties, they find that retail prop-erty performs extremely well within regener-ation areas, which appear to be particularlysuited to shopping centres and retail ware-housing investments.

In France, in contrast, there has been rela-tively little analysis of private-sectordecisions to invest in urban regeneration.The major reform of the French town planningsystem at the end of 2000 introduced by theLoi relative a la solidarite et au renouvelle-ment urbains (Law on solidarity and urban



renewal, known as the Loi SRU), which prin-cipally concerns housing policy and urbanregeneration (Booth, 2003), has promotedresearch on the topic. For instance, a pro-gramme funded by the Caisse des Depots etConsignations (CDC) in 2001 has stimulatedacademic research into the economic aspectsof urban regeneration policy, particularlyprivate-sector investor participation andmotivation in urban regeneration initiatives(Revue Urbanisme, 2002).

An initial piece of research by Trache andGreen (2001), funded by this CDC programme,focused on the rationale for private-sectorinvestors’ involvement in urban regenerationprojects in six European cities: Manchester,Birmingham, Brussels, Lille, Valenciennesand Rotterdam. Once again, this analysisshows that the primary motivation forprivate-sector investors participating in theseinitiatives lies in the achievability of highreturns. Non-finance-based instruments andclarity in public policy and processes aretherefore fundamental and are of similar, ifnot greater, significance to the investor asfinancial incentives. The authors underlinethat three factors are fundamental to privateinvestor involvement: availability of infor-mation, capital constraints and markettrends. However, it is unlikely that all threeconditions will be met in urban regenerationareas. Banks can be reluctant to lend to inves-tors because of the lack of existing investmentin the area. The comparison between the sixEuropean city case studies shows that thereis a clear difference in behaviour betweeninvestors of different sizes and the scale andextent of their operations. Unlike large insti-tutional or international investors, smallerlocal investors have the advantage of intimateknowledge of the local market and regularcontact with both local authorities and localclients, which can be an important factor inpioneer investment. This contrasts with theposition of institutional investors, which maycater for, rather than react to, market demand.

As part of the French research programmefunded by the CDC, we set out to test hypoth-eses previously put forward by Adair et al. andMcGreal et al. regarding the involvement of

private-sector investors in urban regenerationprojects and the importance of the anticipatedrate of return as the primary determinant in theinvestment decision. This paper presents themain results of our study. The originalresearch comprises a comprehensive examin-ation of the pattern of both investment anddevelopment activity during the French com-mercial property market recovery of 1997–2002 and urban regeneration initiatives inthe Paris region. The emergence of suchinitiatives in the Paris region can be explainedwith reference to the general context for prop-erty investment, which considers the invest-ment decision as largely determined byperceived total returns. In this paper, werevisit these issues in the context of a Frenchcase, that of the Paris region, relating to com-mercial property markets. Our survey intro-duces new considerations regarding thecommercial risk (speculative or pre-let build-ings), the investment time-horizon (short-termor long-term), the level of expected IRR(rather than the return on investment, as isusually the case in the literature) and thetiming of the investor’s participation in theproperty cycle (during a downturn or at anyother moment in the cycle). In contrast toTrache and Green, we focus exclusively onlarge investors and developers, withoutincluding local actors. Using the example ofurban regeneration in the Saint Denis plainthrough the development of its new businessdistrict, we consider the drivers for propertyinvestment by private-sector institutional andinternational investors in an urban regener-ation project.

3. Background: Urban RegenerationInitiatives and Commercial PropertyDevelopment in the Paris Region

Some background knowledge of how theFrench commercial property market works isessential in order to understand why theprivate sector invests in certain redevelop-ment areas like the Saint Denis plain urbanregeneration area. Before considering themain results of the survey, we shall thusexamine the state of the commercial property



market that was the setting for this study, par-ticularly the changing nature of the Parisregion investment property market over thepast decade. Then, taking new developmentsand urban regeneration practices in the SaintDenis plain as an example, we outline therole of large investors, mostly short-termforeign investors, in the process. The tra-ditionally industrial Saint Denis area hasbeen gradually transformed over the pastdecade to become one of Paris’ largestmixed-use regeneration areas today. Profilesof actors in the French commercial propertymarket development emerge from ouranalyses.

3.1 Investment Activity in the Paris Region

The Paris region office market experienced anunprecedented overproduction crisis and realestate recession during the 1991–96 period(see Nappi-Choulet, 1997, 1998, for moredetails). This recession was mainly causedby deregulation of the approvals (agrement)procedure and also by the banking system,which used to finance speculative buildingprojects in the late 1980s without demandingany collateral. This office-sector crisisresulted in a significant fall in rental valuesand capital values, which dropped by

two-thirds between 1990 and 1995, leadingto ruin for both operators and their financialbackers. The first investors subsequently tobe interested in the French market wereNorth American hedge funds. Skilled ininvesting against the business cycle, theybought up massive quantities of portfolioswhich had been owned by bankrupt compa-nies and were on the market at bargainprices. These funds benefited from this strat-egy and made large capital gains from 1995to 1999, although high levels of demandcaused a 40–50 per cent surge in the rentalvalues of ‘prime’ offices.

Since then, although the commercial prop-erty markets recovered from the slump ofthe mid 1990s, international investors havedeveloped a considerable interest in Frenchcommercial property markets (see Figure 1).The property investment market in the Parisregion has seen a spectacular reversal of itsdownward trend, influenced by severalfactors simultaneously (DTZ France, 2004),including in particular the reduction ofregistration duties on property sales and lowinterest rates. Also, the opportunities offeredby new developments meeting internationalstandards on large regeneration sites such asthe Saint Denis plain (in the inner northernsuburbs of Paris) and the Paris Rive Gauche

Figure 1. Commercial property investment in France in nominal terms. Source: Immostat.



area (inside central Paris) and disposals bycompanies and state-owned corporations,have made it possible for all types of investorsto invest massively in the office sector.

The exceptional level of activity in the Parisinvestment market occurred under the influ-ence of foreign investors in the market, whoare today’s main actors in the developmentprocess (Figures 1 and 2). Because such a sig-nificant portion of French commercial prop-erty is controlled by non-French investors,their investment decisions currently haveimportant implications for urban regenerationin France. The investment market structure isalso an important factor. For example, untilthe mid 1980s, investment for ownership ofthe completed development usually camefrom French insurance companies and listedproperty companies dealing in commercialdevelopment on a long-term time-horizon(generally more than 15 years). Since themarket’s recovery, developers have donedeals with foreign investors which hold prop-erty and analyse property performance on ashorter time-horizon (in many cases, lessthan five years). These ‘short-term’ actors,mostly pension funds and non-listed vehicles,have emerged as a dominant force in Frenchcommercial property markets. Known as

opportunity funds, they typically have a veryshort life-span, apply a high-risk and high-return strategy and target distressed, underper-forming assets or poorly managed properties,with leverage of around 75 per cent or more(INREV, 2004).

As can be seen from Figure 2, during theperiod 1997–2001, the greatest foreigndemand on the French investment propertymarket came from North American andGerman investors. While the former, mostly‘short-term’ investors, invested in the Parisregion property market in 1996 and 1997,the latter’s involvement has grown constantlysince 2000. Most German investors follow aconservative, medium- or long-term invest-ment horizon strategy, concentrating onnewly let, good-quality assets in primemarkets. However, they began to invest infully let office space outside the Paris CBD(central business district) in early 2000 innew emerging markets.

Unlike German investors, North Americanmanaged and pioneer opportunity funds lookfor value-added opportunities and occupier-driven transactions. They have investedmostly in peripheral markets and innersuburbs in speculative developments andinvestments. Among these areas of

Figure 2. Breakdown of the French commercial property investment market by nationality of investors.Source: CB Richard Ellis Bourdais.



predilection, the Saint Denis plain has beenthe most important emerging district andurban regeneration initiative in the Parisregion during the past decade. We now turnfrom the structural evolution of France’s com-mercial property investment market to thespecific example of the Saint Denis plain, toexplore how new commercial developmentshave occurred within the scope of such anurban regeneration initiative.

3.2 Emerging Districts and UrbanRegeneration Initiatives: The Saint DenisPlain

Urban regeneration in France is quite a recentphenomenon, essentially encouraged by theFrench government and the French Ministryof Urban Affairs since 1994. The implemen-tation of urban policy was first achievedthrough contrats de ville—urban developmentagreements—which were designed to create aglobal approach to the issue. In 1999, theFrench government laid out its priorities forurban policy, focusing its action on fourthemes: crime prevention, employment, econ-omic development and urban regeneration(DIV, 2000). In 2000, 247 contrats de villeinvolving more than 1500 neighbourhoodsand over 1 million housing units in Francewere concluded for a seven-year period.These urban development agreements,signed between the state and local partners,such as regional/local authorities or socialhousing organisations, implement insti-tutional partnerships within the frameworkof an agreed urban and social project.

In 1999, the French government introduceda new initiative designed to extend the sphereof the contrats de ville to include entire urbanareas in grands projets de ville (literally,‘major city projects’). This brought about thecreation of 50 large development projects fordeprived urban sites in France covered bythe contrats de ville. Around 20 of these 50grands projets de ville are located in theParis region and concern former industrialareas or social housing estates that are theheritage of extensive post-war urbanisation.Most of them are located in the northern and

eastern part of the region. The nature of thepartnerships and relationships between organ-isations, and the process of redevelopment inurban renewal in Paris—based on the Bercysite case—have been extensively describedand compared with London’s Surrey dockssite by Nelson (2001). In both case studies,major public–private partnerships were setup for the development of new business dis-tricts, both initiated by the private sector aslargely speculative projects. According toNelson, the goals of these partnerships wereclearly primarily economic, with any socialbenefits being secondary. The public sectorunderwrote the development risk involved inthe major public–private partnership in bothcases, with a new metro line in the Bercycase and investment in the transport infra-structure as well as tax relief measures in theCanary Wharf case.

The case of the Saint Denis plain renewal isa good illustration of how private propertydevelopers and investors have been involvedrecently in one of the largest mixed-use regen-eration areas in Paris. The site, located on thenorth edge of central Paris, is included in thegrand projet de ville for the PlaineCommune conurbation located in the innernorthern suburbs of Paris, formerly the siteof industrial factories, warehouses and socialhousing estates. Created in 1999, the PlaineCommune conurbation comprises seventowns, including the town of Saint Denis(see Figure 3). The creation of this newgrand projet de ville has given new impetusand greater consistency to the developmentof the area in the Paris region over the pastfew years. The area is home to 273 000inhabitants and covers 35 square km. ThePlaine Commune conurbation committeeworks on the urban development project laiddown in the framework of the global develop-ment policy. The approach is based on devel-oping a dynamic urban mix forming a centreof growth to the north of Paris, on the strategicParis/Roissy Charles-de-Gaulle airport axis.The plan is to double the number of inhabi-tants and the number of employees in thenext 20 years and to transform the area intoa major development centre. The decision to



build the Stade de France internationalstadium and the state’s infrastructure commit-ments made at the time helped to acceleratethe revitalisation process of the area.

The Saint Denis plain area is part of thePlaine Commune grand projet de ville andconstitutes one of the new urban regenerationinitiatives located in the town of Saint Denis,around the new Stade de France stadium(see Figure 3). Formerly the industrial heart-land of the Paris region and indeed of Francebetween 1850 and 1950 (with the Pleyelpiano factory, EDF electricity plants, the

Christofle silversmith factory, etc.), the sitesuffered serious economic decline in thepost-war years. Because of its huge landreserves (600 ha), mainly land vacated bythe French railway system and defunct fac-tories, the Saint Denis plain has benefitedfrom many infrastructure projects and hasreceived significant public investment overthe past decade, totalling over Euro 1 billion(for example, the Stade de France stadium in1993 which housed the football World Cupin 1998, roofing of the A1 motorway andextension of the Paris RER rapid-transit rail

Figure 3. The Saint Denis plain in the grand projet de ville of Plaine Commune in the northern part of theParis region. Source: Plaine Commune.



system line in 1998, decontamination of landand the water-table) as part of the PlaineCommune project.

During the property boom of the late 1980s,the local office market, which was small-sized, was only concentrated in the Pleyelarea developed in the late 1970s on thewestern side of the Saint Denis plain. At thetime, most institutional funds were reluctantto invest in this unfashionable northern areaof the Paris region and the main propertyboom was concentrated in the traditionalbusiness districts of Paris, located in centralParis and its immediately adjoining westernsuburbs (see Figure 4). The Saint Denisplain thus suffered from an enduring negativeimage, with connotations of industrial zonesand underprivileged urban areas.

Over the past decade, with the PlaineCommune urban regeneration initiative, twonew service-sector areas have been createdin the middle of the Saint Denis plain,through the French ZAC (mixed developmentzone) procedure: the LandyFrance (27 ha) andCornillon (13 ha) zones (see Figure 3). Over

265 000 square metres of office space werebuilt in these old brownfield areas in threeyears during the 2000–03 period, transform-ing the former industrial site into a newParis business district. The LandyFrancezone alone covers a total of 177 000 squaremetres divided into 6 blocks of between12 000 and 39 000 square metres, making itthe biggest building project in the SaintDenis plain and even in the whole Parisregion. Opposite the Stade de France building,which started the renewal of the area, thisformer contaminated industrial zone extendsover an area of 27 hectares and offers 5000square metres of retail space and a programmeof 450 homes.

For the first time, at the end of the 1990s,the Saint Denis plain came to be seen as agood investment opportunity by pioneerinvestors who launched the market—notably,what the French call ‘Anglo-Saxon’ investorssuch as LaSalle Investments, Awon, White-hall or Orion Capital Managers. In 2002–03,over Euro 1 billion was invested by private-sector investors in new office buildings in

Figure 4. Location of the main office districts in the inner suburbs of Paris. Source: Jones LangLaSalle–Immostat.



the Saint Denis plain (including the Pleyel,LandyFrance and Cornillon zones).

The case of this new business developmentin Saint Denis is interesting for three reasons.First, the involvement and concentration offoreign investors is considerable, reaching alevel never seen before in the Paris regionoffice investment market. In the LandyFrancezone alone, for instance, almost all the firstoffice developments were managed byforeign investors. Secondly, as we can seefrom Table 1, almost all new large officebuildings bought in the area were developedon a speculative basis between 1999 and2003, without pre-defined users, althoughthis type of development had been avoidedby all developers and investors in the main tra-ditional Paris business districts since the pre-vious property recession of the mid 1990sand its high vacancy rates. Thirdly, the lastdistinguishing feature of this urban regener-ation initiative is that the commercial propertymarket was launched by short-term investorslooking for new assets against a downturn inthe property cycle. Most of the pioneer inves-tors who launched the Saint Denis plainmarket considered their investment life-cycleon a short-term basis (between two and fiveyears). The most interesting example is theAmerican investor Awon, which single-hand-edly bought around one-third of the totaloffice space developed in the area (3 buildingstotalling 68 000 square metres), and resoldthe assets one year later, in the middle of theproperty cycle.

Within a few years, the various Saint Denisareas have thus come to make up one of themost buoyant service districts as far as largeoffice buildings are concerned (more than5000 square metres). The building of top-quality programmes in the Saint Denis plainarea, comparable in technical and functionalterms with the greatest tower blocks in theLa Defense business district on the westedge of Paris, at rents that remain lower thantraditional business district rents, has made itpossible to attract ‘secondary offices’ as wellas some head offices. Because of a lackof such buildings in the traditional businessdistrict and strong demand from users, most

of the buildings developed on a speculativebasis (without known tenants at the start ofthe development), were quite quickly let tousers such as Siemens or AGF (see Table 1).By 2001, at the peak of the cycle, the SaintDenis area accounted for 43 per cent of theoverall volume of transactions in the Parisregion for surface areas of over 5000 squaremetres. More recently, new actors investingon a long-term time-horizon basis haveappeared in the Saint Denis plain, notablyGerman investors such as Difa. These ‘long-term’ investors, who prefer a ‘patrimonialapproach’, have taken the place of pioneerinvestors who had invested in the marketduring the downturn and middle of thecycle. Formerly the Ile-de-France region’sindustrial heartland, the Saint Denis plain isnow at the centre of north-east Paris’ newservice district.

4. Methodology and Profile of CompaniesSurveyed

The aim of our study is to understand thedrivers of commercial property investmentand development in the Paris region ingeneral and particularly in urban regenerationareas. This paper thus revisits the issue exam-ined by Adair et al. (1998, 1999) and McGreal(2003), considering the case of France, withspecial reference to the example of the SaintDenis plain. We used a behavioural surveybased on a questionnaire administered inApril and May 2003 to large property develo-pers and investors who had actively partici-pated in the Paris region commercialproperty sector during the French propertymarket recovery of 1997–2002. This surveywas undertaken by means of direct interviewswith a senior executive. The main objectivewas to find out how urban regeneration pro-jects and locations are perceived by suchlarge private-sector investors and developersand to identify what can be done to improvetheir participation in these projects. The ques-tionnaire responses provided general infor-mation about the behaviour and strategy ofinvestors and property developers during therecovery period, their perception of risk and



Table 1. List of the office buildings developed in the Saint Denis plain, 2004

Office building Year Area Investor User Commercialisation

Cap Pleyel 1999 Pleyel AIG EDF Speculativebuilding

Siege Afnor 1999 Cornillon Afnor Afnor Turn-keyVedior Bis 1999 Cornillon Difa Vedior Bis Turn-keyGrand Angle 2001 Pleyel Deka Siemens Speculative

thenpre-letbuildings

Paris Stade 2001 Other Awon/DGE AGF Speculativethenpre-letbuilding

Le Cap 2001 Cornillon Wereldhave Canal Plus Speculativethenpre-letbuilding

Le Mondial 2002 Cornillon La Salle CIC/SNCF/PlaineCommune

Speculativethenpre-letbuilding

Axialis 2002 Cornillon Difa Dir. Gen.Impots

Speculativebuilding

Etoile Pleyel 2003 Pleyel Fructiger AFSSAPS Speculativethenpre-letbuilding

Perspective Seine 2003 Other Orion Nextira One Speculativebuilding

Cap Lendit 2003 Landy Axa No user Speculativebuilding

Carre Pleyel 1 2003 Pleyel Morgan Stanley No user Speculativebuilding

Eurostade Est 2003 Landy Difa No user Speculativebuilding

Eurostade Ouest 2003 Landy ING SNCF Speculativebuilding

Innovatis 1 2003 Landy Generali Generali Speculativebuilding

Innovatis 2 2003 Landy Sophia No user Speculativebuilding

Belvedere 2004 Cornillon Predica No user Speculativebuilding

Le Jade ,2003 Landy Awon No user Speculativebuilding

Le Stadium ,2003 Cornillon GCI/Whitehall ABNAmro/Beko

Speculativebuilding

Le Triangle ,2003 Cornillon Sogecap No user Speculativebuilding

Le Wilo ,2003 Landy Awon/Generali Generalia Speculativebuilding

Les Borromees 1 ,2003 Other Sogelym Steiner Ministere del’Interieur

Pre-let building

ANAES ,2003 Cornillon CNP ANAES Turn-key

aThe sale of the building by Generali is in progress.

Source: author.



their attitudes towards urban regeneration andpublic assistance. In this study, we seek toexplore commercial real estate investmentstrategies and to test hypotheses advancedby previous literature concerning the maindeterminants of private-sector decisions toinvest in and develop urban regeneration pro-jects, particularly commercial property pro-jects (shopping centres and offices). Theresults of the survey are presented in thenext section.

Sampling procedures were applied toensure representation of the various investorand developer groups which actively partici-pate in commercial property markets, particu-larly in office buildings, shopping centres orwarehouses. All these participants wereactively involved in the Paris region propertymarkets during the 1997–2002 period andsome had participated in urban regenerationprojects. The sample was initially compiledfrom a very recent property database inFrance, only available since 2001: Les inves-tisseurs en 2001 et 2002, published by theFrench professional property newsletter Lalettre m2. This database lists all the annualinvestment figures for commercial propertymarkets in France generally and the Parisregion since 2001. Most of the data are avail-able for the Paris region. A total of 45 Frenchand international companies were listed whichhad invested more than Euro 20 million peryear in 2001 and 2002 in the Paris region.From this population, a total of 34 responseswere received. This is a response rate of 76per cent, which is very satisfactory.

The survey questionnaire, comprising 27questions, is divided into three parts. Thefirst part seeks background informationabout the company. Questions in this partalso inquire about property investors’ anddevelopers’ practices during the period1997–2002, which saw the recovery of theFrench and Paris region commercial propertymarket. It explores the financial and strategicmotives behind development, but also the maininvestment portfolio policy and motivationsof the respondents during this period, indepen-dently of urban regeneration projects. Thesecond and last parts of the survey deal

specifically with urban regeneration. Part 2contains an opinion poll about urban regener-ation projects and the role of public policy andincentives in private investor-developer par-ticipation in these projects. The last partfocuses on the motivations, determinants andintentions of the sample companies that takepart in urban regeneration initiatives. In thispart, participants who have already beeninvolved in urban renewal projects are separ-ated from those who have not.

Table 2 provides some details about thecompanies surveyed. A fundamental consider-ation of the research was to ensure represen-tation of the various types of commercialproperty actors. Two groups were selected:property developers that act as intermediaries,carrying out development on behalf of aninvestor or owner-occupier, in some casesbearing the risk and operating on limitedequity, and property investment companieswhich own the properties directly. The firstgroup—property developers—represents 47per cent of the sample (16 entities in total).These developers mainly specialise in shop-ping centres and office developments. Thesecond group, property investors, represents53 per cent (18 entities in total) of thesample distributed between 10 quoted prop-erty companies (30 per cent of the sample)and 8 institutional investors—i.e. insurancecompanies, pension funds or property assetmanagers (24 per cent). Half of these investorsare French and half foreign. During the 1997–2002 period, the Paris region was the majorlocation for 74 per cent of companies includedin the survey; 30 per cent of those companieshad invested in the Paris central businessdistrict.

Regarding the sample companies’ involve-ment in urban regeneration, 68 per cent (23companies in total) had already been involvedin urban regeneration initiatives in France. Ofthose 23, 48 per cent are developers, 30 percent institutional investors and 22 per centquoted property companies. In particular, 26per cent (8 in total) had invested in urbanregeneration projects outside France and 41per cent (14 in total) had been involved inthe Saint Denis plain project. Approximately



Table 2. Bivariate analysis

Involvementin urban

regeneration

Non-involvementin urban

regeneration Total

Involvementin St Denis

area

Non-involvementin St Denis

area Total

Type of actorsInstitutional investors 7 1 8 5 3 8Developers 11 5 16 7 9 16Property companies 5 5 10 2 8 10Total 23 11 34 14 20 34

Average investment holding periodLess than 5 years 10 6 16 7 9 16More than 5 years 13 5 18 7 11 18Total 23 11 34 14 20 34

Type of participationSpeculative development 13 2 15 8 7 15Pre-let development 8 8 16 5 11 16Total 21 10 34 13 18 31

Financing of operationsMostly debt financing 13 8 21 7 14 21Mostly equity financing 10 3 13 7 6 13Total 23 11 34 14 20 34

Share of equityLess than 20 per cent 7 3 10 7 3 10More than 20 per cent 16 8 24 7 17 24Total 23 11 34 14 20 34

Moment of participationin the property cycle

Downturn in the cycle 8 5 13 4 9 13Middle of the cycle 3 1 4 3 1 4Any stage 12 5 17 7 10 17Total 23 11 34 14 20 34

Expected IRRLess than 15 per cent 11 6 17 7 10 17

(Table continued)

15

24

ING

RID

NA

PP

I-CH

OU

LE

T


Table 2. Continued

Involvementin urban

regeneration

Non-involvementin urban

regeneration Total

Involvementin St Denis

area

Non-involvementin St Denis

area Total

More than 15 per cent 12 5 17 7 10 17Total 23 17 34 14 20 34

Motivation for participation,1997–2002

Land reserves 8 2 10 4 6 10Return on investment 9 5 14 6 8 14Asset location 6 4 10 4 6 10Total 23 11 34 14 20 34

Efficient public aids in urbanregeneration initiatives

Grant-based instruments 1 3 4 1 3 4Non-grant-based instruments 20 8 28 13 15 28Total 21 11 32 14 18 32

Indirect public aids in urbanregeneration initiatives

Public infrastructure andneighbouring environment quality

10 5 15 10 5 15

Land availability and costs 10 3 13 3 10 13Total 20 8 28 13 15 28

Opinion about urbanregeneration initiatives

Future development potential zones 12 6 18 8 10 18Risky zones 11 5 16 6 10 16Total 23 11 34 14 20 34

Risk associated with urbanregeneration projects

Rental risk 14 6 20 9 11 20Risk of resale 2 3 5 2 3 5Administrative risk 5 1 6 2 4 6Total 21 10 31 13 18 31

TH

EC

OM

ME

RC

IAL

PR

OP

ER

TY

MA

RK

ET

INF

RA

NC

E1

52

5


one-third of the total sample consider suchurban regeneration projects as highly riskyprojects and 54 per cent see them as havingfuture development potential.

Because of the qualitative nature of thesurvey variables, a multiple correspondenceanalysis (MCA) approach was undertaken todraw up a typology of participants in commer-cial property markets during the 1997–2002period. This inductive approach is a generalis-ation of correspondence analysis for categori-cal variables; the goal of the method is toachieve a global view of the data that will beuseful for interpretation. It makes it possibleto map and describe the associationsbetween several categorical variables andattributes of the survey sample and thus ident-ify stable patterns in the data. The theory ofcorrespondence analysis is explained indetail in several publications (for example,Benzecri, 1973; Greenacre, 1984, 1993) andis often used in marketing literature. Thisdescriptive statistical technique, while par-ticularly useful for analysing large numbersof observations, is nevertheless well-suitedto smaller-sized samples, provided that thenumber of active variables included in theanalysis does not exceed the number of indi-viduals in the sample.

Eigenvalues are vitally important ininterpretation of the axes. These eigenvaluesare used to assess the general form of thecloud and indicate which axes matter. Theyare used to determine the amount ofexplained variance. The first four eigen-values of the analysis are respectively0.325, 0.259, 0.251 and 0.180. However,these proportions often provide a pessimisticindication of fit and are uninterpretable. Wetherefore used the inertia adjustment pro-posed by Benzecri (1979), which producesa better indication of which axes matterand should be used for the analysis. Thisadjustment does not affect the contributions,which are still calculated in relation to theoriginal eigenvalues. The adjusted eigen-values are respectively 0.058, 0.028, 0.025and 0.006. The corrected percentages ofinertia for the first four dimensions arerespectively 48.1 per cent, 22.9 per cent,

20.4 per cent and 5.0 per cent (seeTable 3). They give an accurate expressionof the relative importance of the factors.Axis 1 represents 48 per cent of the totalinertia of the cloud. Axis 2 accounts for 23per cent of the explained variance and thethird axis represents 20 per cent of theinertia. The cumulated inertia of those 3factors is thus 91.4 per cent; therefore, wedecided to keep only the first 3 axes forour analysis. The ACM analysis was per-formed on 9 relevant variables as listed inTable 3. To interpret the results, we includedand plotted supplementary points that werenot used in the original analysis. Thesedata concern, for example, participation ornon-participation in urban regeneration andin the Saint Denis plain urban renewal.

Because of the qualitative aspect of thevariables and the small size of the surveysample, non-parametric tests were used toanalyse private-sector involvement in urbanregeneration projects: the chi-squared testand the exact Fisher test. We tested relation-ships between dichotomic variables such asUrban regeneration involvement (and SaintDenis plain property involvement) or opinionabout urban regeneration projects and thestrategy employed or the perception of riskduring the property market recovery period.Tables 4 and 5 present the results of theseindependent tests.

5. Results and Discussion of the EmpiricalFindings

5.1 Towards a Typology of PropertyParticipants in the Paris Region CommercialProperty Market

To interpret an MCA, the absolute contri-butions and squared correlations are calcu-lated for each axis (Greenacre, 1984).Table 3 presents the basic numerical resultsof the MCA analysis for the first threedimensions (i.e. factors). The contributionsare coefficients of determination giving theexplained variance of each variable by eachdimension or factor. Figures 5 and 6 showthe MCA maps created by combining the



Table 3. Eigenvalues, contributions and squared correlations for multiple correspondence analysis

Dimension1 2 3

Eigenvalue 0.325 0.259 0.251Percentage of inertia 16.3 13.0 12.5Adjusted eigenvalue 0.058 0.028 0.025Corrected percentage

of inertia48.1 22.9 20.4

Contributions Cosine2 Contributions Cosine2 Contributions Cosine2

Investment 0.0918 0.2593 0.1049Less than

50 million E

0.0064 0.0296 0.1384 0.5097 0.0001 0.0004

50 to 100 million E 0.0004 0.0014 0.0002 0.0007 0.0392 0.1153More than

100 million E

0.0248 0.0909 0.0456 0.1329 0.0630 0.1775

Do not know 0.0602 0.2206 0.0750 0.2187 0.0026 0.0074

Zone 0.1449 0.0893 0.1744Paris business district 0.0961 0.4223 0.0543 0.1898 0.0018 0.0062Paris region 0.0285 0.1563 0.0079 0.0348 0.0636 0.2691Province 0.0203 0.0744 0.0271 0.0789 0.1090 0.3072

Motivations forimplantation

0.1834 0.2887 0.0073

Return oninvestment

0.0886 0.4580 0.0289 0.1189 0.0041 0.0165

Land availability 0.0914 0.3826 0.0512 0.1706 0.0019 0.0060Asset location 0.0034 0.0138 0.2086 0.6633 0.0013 0.0040

Investment holdingperiod

0.1969 0.0000 0.0001

Less than 5 years 0.0984 0.5768 0.0000 0.0000 0.0000 0.0001More than 5 years 0.0984 0.5768 0.0000 0.0000 0.0000 0.0001

Moment in theproperty cycle

0.0233 0.1407 0.1151

Downturn 0.0023 0.0105 0.0797 0.2934 0.0176 0.0626Middle 0.0117 0.0396 0.0001 0.0002 0.0954 0.2483Any 0.0094 0.0548 0.0609 0.2839 0.0021 0.0095

Quality of assets 0.1390 0.1280 0.1853Old 0.0001 0.0003 0.0764 0.2324 0.1016 0.2988Renovated 0.1161 0.3924 0.0469 0.1261 0.0184 0.0479New 0.0228 0.1823 0.0047 0.0298 0.0654 0.4021

Type of participation 0.0721 0.0458 0.0983Speculative 0.0271 0.1403 0.0062 0.0257 0.0294 0.1171Pre-let 0.0356 0.2085 0.0000 0.0000 0.0461 0.2081Do not know 0.0093 0.0293 0.0396 0.0989 0.0228 0.0550

Financing ofoperations

0.0007 0.0269 0.0695

Debt 0.0003 0.0021 0.0107 0.0626 0.0278 0.1568Equity 0.0004 0.0021 0.0161 0.0626 0.0417 0.1568

Expected IRR 0.1479 0.0214 0.2450Less than 10 per cent 0.0008 0.0030 0.0153 0.0486 0.0171 0.052610 to 15 per cent 0.0936 0.3575 0.0023 0.0070 0.0225 0.066115 to 20 per cent 0.0208 0.0833 0.0033 0.0105 0.0928 0.2853More than 20 per cent 0.0327 0.1251 0.0005 0.0016 0.1127 0.3316


at Groupe ESSEC on April 11, 2011usj.sagepub.comDownloaded from


first three axes of inertia, representing thecloud of modalities. The first two-dimensionalmap (Figure 5) alone explains at least 71 percent of the total inertia of the 9 active vari-ables. This graphic output of correspondenceanalysis, which visualises the low-dimen-sional space relationships between variables,is particularly rich in information that can beused for setting up a typology of part-icipants. To interpret the graph, the positions,relative to an axis, of the points belonging to agiven cloud are examined. If two such pointsare close on the graph, they will have asimilar profile. Graphically, the further a

point is from the origin, the smaller its mar-ginal weight and the bigger its contributionto inertia. Similarly, the smaller the anglebetween a point and an axis, the closer to 1its squared correlation (cosine2) on this axis.

From Figure 5, a homogeneous form can beobserved for the cloud of modalities in plane 1-2. No quadrant of this plane is empty and manymodalities are also positioned at the extremityof the axis, indicating that several of thesurvey questions have contributed to discrimi-nate the sample population. This gives an inter-esting view of the interrelationships betweenthe different factors of property investment.

Table 4. Non-parametric tests for independence between the variable investment holding period(,5 years, .5 years) and other factors

Variables Test Probability

Type of actors (developers, investors) Chi squared ,0.0001��

Type of participation (speculative, pre-let development) Chi squared 0.2103Financing of participation (debt, equity) Chi squared 0.5327Share of equity (less than 20 per cent, more than 20 per cent) Fisher exact 0.0166��

Moment of participation in the cycle (downturn, other or indifferent) Chi squared 0.9337Expected IRR (less than 15 per cent, more than 15 per cent) Chi squared 0.0393��

Motivation of participation (return on investment, other) Chi squared 0.0122��

Efficient public aids (grant, indirect) Fisher exact 0.6502Indirect public aids (land availability and costs, public

infrastructure and neighbouring environment quality)Chi squared 0.1356

Opinion (risky zones, future development potential zones) Chi squared 0.0817�

Risk (rental risk, other) Chi squared 0.3205

�significant at the 10 per cent level; ��significant at the 5 per cent level.

Table 5. Non-parametric tests for independence between the variable involvement in urban regenerationinitiatives and other factors

Variables Test Probability

Type of actors (developers, investors) Chi squared 0.8969Investment holding period (less than 5 years, more than 5 years) Chi squared 0.5453Type of participation (speculative, pre-let development) Fisher exact 0.0345��

Financing of participation (debt, equity) Fisher exact 0.9026Share of equity (less than 20 per cent, more than 20 per cent) Fisher exact 0.5914Moment of participation in the cycle (downturn, other or indifferent) Fisher exact 0.4086Expected IRR (less than 15 per cent, more than 15 per cent) Chi squared 0.7139Motivation of participation (return on investment, other) Fisher exact 0.5055Efficient public aids (grant, indirect) Fisher exact 0.1055Indirect public aids (land availability and costs, public

infrastructure and neighbouring environnment quality)Fisher exact 0.4309

Opinion (risky zones, future development potential zones) Chi squared 0.8969Risk (rental risk, other) Fisher exact 0.5096

��significant at the 5 per cent level.



Using Table 3 to identify the importantpoints in the map, we see that the first factoris a dimension which groups together the fol-lowing factors, in order of explained variance:investment holding period, motivation forimplantation and expected IRR. These threefeatures represent almost 52.8 per cent of thevariance explained by the first dimension.The second dimension appears to be explainedmainly by the following factors: motivationfor implantation (return on investment, assetlocation or land availability), moment in theproperty cycle and the size of the investment.Lastly, the third dimension groups variablessuch as the zone of property investment anddevelopment during the 1997–2002 period,drawing a distinction between the Parisregion and the province, or variables such asexpected IRR.

Through the use of MCA, we can developtestable hypotheses about reliable associations

between types of actors and the factors or cri-teria they take into consideration in theirdecision-making. We have seen that theinvestment holding period is one of the mostimportant variables which can discriminatethe population into two sub-groups: respon-dents who participate in the commercial prop-erty market on a short-term basis (less than 5years) (16 respondents) and those who partici-pate on a long-term basis (more than 5 years)(18 respondents). Non-parametric tests forindependence between this variable andother factors show a statistically significantdifference between the two sub-groups(Table 4).

This is particularly clear regarding themotivation for participation in the commercialproperty market. Return on investment consti-tutes the main factor for 61 per cent of therespondents who invest on a long-termtime-horizon (more than 5 years), but only

Figure 5. Study of the MCA plan 1-2.



for 19 per cent of the 16 respondents whoinvest on a short-term time-horizon (lessthan 5 years), who see land availability orasset location and value appreciation asmore important.

In the same way, higher expected IRR (i.e.more than 15 per cent) is a measurable goalfor companies with a short-term investmentholding horizon and conversely, with a differ-ence that is statistically significant at the 0.05level. According to standard property invest-ment theory, such a high level of IRR can beobtained with positive leverage, particularlywith a low share of equity. Thus, 50 per centof respondents who invest on a short-termtime-horizon use less than 20 per cent ofequity in their investment. This difference isalso significant at the 0.05 level. The highlevel of statistical significance (0.05) associ-ated with this criterion suggests that theunderstanding of the Paris region commercial

property market during the 1997–2002 recov-ery period should be analysed through thisnew framework.

With the profound changes in the propertymarket over the past decade (as described insection 3.1) due to globalisation of both theeconomy and the property market, the tra-ditional French property market boundariesbetween short-term developers and long-term institutional investors have begun toblur. Today, due to the major role played byforeign investors, a new typology of propertyactors appears to be emerging and structuringthe property market. The main differencebetween them lies in the length of their invol-vement in the market. For instance, we canseparate short-term investor-developers fromlong-term ones. As can be observed from themarket and the Saint Denis plain case study(in section 3.2), these ‘short-term’ actors,mostly pension funds and non-listed vehicles,

Figure 6. Study of the MCA plan 1-3.



have emerged today as a dominant force incommercial property markets. Our resultsthus confirm the typology presented byINREV regarding non-listed vehicles, whichhave considerably expanded in the past fiveyears in Europe and France; the INREV typol-ogy is largely based on the investment time-horizon strategy (INREV, 2004).

5.2 Urban Regeneration Involvement

The second and last parts of the survey dealspecifically with urban regeneration. Morethan two-thirds of the respondents (67.6 percent, 23 in total) had already been involvedin urban regeneration initiatives located inFrance (and 41 per cent had invested in theSaint Denis plain urban regeneration pro-jects). Of these two-thirds, 48 per cent aredevelopers, 30 per cent institutional investorsand 22 per cent quoted property companies. Infact, 26 per cent of the total respondents hadinvested in such initiatives abroad. Of thesub-group of companies involved in Frenchurban regeneration initiatives, 61 per cent hadparticipated in the Saint Denis plain project.Lastly, approximately one-third of the sampleconsider these urban regeneration projects ashighly risky projects, while 54 per cent seethem as having future development potential.

Turning to the MCA maps, and particularlyto the modalities relative to urban regener-ation (involvement in urban regenerationinitiatives, non-participation in urban regen-eration initiatives and involvement in SaintDenis), we can observe dependence betweenthese modalities and variables of propertyinvestment decision-making. In particular, itcan be noted from Figures 5 and 6 thatactors who have participated in urban regener-ation initiatives, particularly in the SaintDenis plain regeneration, are closely associ-ated with those who look for speculativebuildings and variables such as high returns(over 20 per cent). In contrast, actors whodo not participate in urban regeneration areused to investing generally in pre-let assets,in the long term and expect lower returns.This confirms our observations in part 3regarding the speculative nature of the

buildings developed in the Saint Denis plain(see Table 1).

Investment and involvement in urbanregeneration projects, especially the SaintDenis plain redevelopment, were tested withrespondent companies to identify their mainfeatures and motives for participation in thecommercial property market. Tables 2 and 5present the bivariate analysis and the testsbetween the set of companies which partici-pated in urban regeneration during the1997–2002 period and the set of thosewhich did not.

The most frequent hypothesis developed inthe literature is that urban regenerationlocations or projects are perceived by theprivate sector as high-risk/low-return pro-jects, offering only weak investment opportu-nities, and that total return emerges as theprimary factor influencing investmentdecisions (see Adair et al.). In our survey,although achievement of high returns oninvestment was considered as the primary cri-terion in the investment decision-makingprocess for 41 per cent of the respondent com-panies during the 1997–2002 period, no sig-nificant difference in behaviour can beobserved between the sub-group of companiesinvolved in urban regeneration and the sub-group of companies not involved. Other cri-teria have been listed such as land availabilityand costs or property asset location and valueappreciation, which were both identified by 29per cent of respondents as a major factor.

Paradoxically, the results in Table 5 alsoshow the absence of any statistically signifi-cant dependence between urban regenerationinvolvement and other factors such as theexpected IRR. However, the only highly sig-nificant difference between the two sub-groups in our analysis concerns the type ofcommercial risk borne by the respondentsand the nature of their participation in thedevelopment process. The results of thedependence tests regarding the relationshipsbetween the studied variable and the handlingof the commercial risk are really very enligh-tening. The analysis indicates that there is acorrelation between the decision to participatein urban regeneration projects and the type of



commercial risk chosen. It is apparent thatparticipants involved in urban regenerationhave a willingness to invest in speculativeoperations with no rental guarantee andwithout knowing who the final users will be,such that they bear the entire commercialand rental risks. This test confirms the resultshown in Table 2 that 62 per cent of thesample respondents involved in urban re-generation projects participated in speculativedevelopment operations. They also confirmwhat can be observed from the Saint Denisplain case study and what Nelson (2001)already mentioned in his comparative study ofthe development of new business districts inthe Paris Bercy site and London’s Surrey docks.

Finally, if we take another look at theinvestment holding period variable, it is inter-esting to note that 43 per cent of the compa-nies already involved in urban regenerationprojects have a projected investment holdinghorizon of less than 5 years (and less than 7years for 63.6 per cent) and do not take a‘patrimonial approach’. This is also predomi-nantly the case in the Saint Denis plain devel-opment (50 per cent). Our analysis alsoindicates that, in their investment strategy,38 per cent of the companies chose tobecome involved during the downturn in theproperty cycle, when market values werethe lowest, 12 per cent in the middle ofthe market cycle and 50 per cent of thesample did not mind, or did not knowexactly, which stage, although the differenceis not statistically significant between thesetwo sub-groups (i.e. downturn and middle/any stage). The test is, however, significantat the 0.10 level if we consider respondents’opinions about urban regeneration initiatives.Of respondents who consider urban regener-ation projects highly risky (47 per cent ofrespondents), almost two-thirds generallyinvest for a long-term period. Conversely,those who consider urban regeneration initiat-ives as potential zones of development investfor a short-term time-horizon.

The level of statistical significance associ-ated with these criteria suggests that there isa correlation between the decision to partici-pate in urban regeneration projects and the

type of commercial risk chosen. It seemsthat participants involved in urban regener-ation prefer to invest in speculative oper-ations, with no rental guarantees and anunknown final tenant, thus bearing the entirecommercial and rental risk. This interest insuch risky operations can be understood ifwe consider that private investors look pri-marily for capital appreciation and anticipatehuge capital gains by investing during thedownturn in the property cycle and in future-potential zones. Regeneration initiatives canstimulate counter-cyclical investment (Adairet al., 2003). For the 23 companies which par-ticipated in urban regeneration projects, theanticipation of an increase in property value,and the nature and quality of propertytenants, was identified by 13 per cent as amajor factor in their decision. Factors suchas land prices or competing participants areminor influences (5 per cent and 4 per cent).It is also very interesting to note that morethan one-third of these participants attachgreater importance to participation during adownturn in the property cycle, when the pro-spects for capital gains are the highest.However, this relationship cannot be tested.As suggested by Jones (1996) and McGrealet al. (2000), property-cycle-related capitalappreciation seems to be a primary factor bywhich new projects are evaluated in urbanregeneration initiatives.

A relationship between the decision to par-ticipate in urban regeneration initiatives andthe nature of the risk (perception of the riskand risk bearing) is also observed, butcannot be tested. The survey analysis indi-cates that 66 per cent of the sample considerthe primary risk for urban regeneration pro-jects to be associated with rental risk (seeTable 2). The administrative risk associatedwith the length of the administrative for-malities and planning permission procedureor the cost of land decontamination, wasidentified as major by the second-largestgroup (19 per cent). Thus, the resale risk isnot seen as predominant. It was consideredthe major risk by only 16 per cent ofthe total respondents and 9.5 per cent of theparticipants in urban regeneration.



Finally, urban regeneration involvementand public initiatives were tested for ourrespondent companies, without any success.However, indirect public non-grant instru-ments, such as the nature or quality of publicinfrastructure, are fundamental investmentfactors for 47 per cent of the sample compa-nies. Furthermore, cost and availability ofland are considered as a fundamental factorby 41 per cent of the respondents. In contrast,only 12 per cent of the companies identifiedpublic financial grants to be a major incentiveto participation in urban regeneration. Of theparticipants in urban regeneration, 96 percent consider non-grant-based instruments asthe most efficient way to encourage private-sector involvement in urban regenerationinitiatives. This applies particularly to thequality and quantity of public facilities (38per cent of responses) and the cost and avail-ability of land (48 per cent of responses).

6. Conclusion

The objective of this paper is to examine thefeatures and motives of large property develo-pers and investors who participate in the Parisregion commercial property markets ingeneral and in urban regeneration projects inparticular. The analysis presented has focusedon the behaviour patterns of 34 large compa-nies during the last period of property invest-ment recovery in the region, 1997–2002. Thecase of the Saint Denis plain urban regenerationin the traditional industrial northern innersuburb of Paris provides an interestingexample of private-sector investor involvementin public urban regeneration policy. In just afew years, this site, which had long sufferedfrom a very negative image, has seen newhousing and major commercial property devel-opments spring up, transforming part of theurban regeneration zone into a new businessdistrict. The success is all the more impressivebecause the northern part of the Paris regionused to be an industrial zone and most businessdistricts are located in the opposite, westernpart of Paris.

Based on a correspondence analysis, wehave tried to analyse investors’ and developers’

choice processes, introducing into the surveynew considerations relative to the commercialrisk (speculative or pre-let buildings), theinvestment time-horizon (short-term or long-term), the expected IRR (instead of return oninvestment as is usually the case in the litera-ture) and the timing of participation in theproperty cycle (during a downturn or at anystage of the cycle). We set out to produceresults that could provide a comprehensiveclassification of private-sector behaviours,highlighting the similarities and differencesbetween property actor types. The typologydefined identifies the relationships betweenthese behaviours and the various motivesunderlying investment decision-making.

Regarding investors’ motivations for par-ticipation in the Paris region commercialproperty market in 1997–2002, at the end ofthe property recession, the analysis confirmsthat achievement of high returns on invest-ment and IRR were considered as theprimary criteria of the investment-makingdecision, as the real estate literature indicated.Most of the property market actors wanted toparticipate in new building or renovation pro-jects and often had a short-term investmentholding period. At the same time, low interestrates had encouraged debt-driven investorsand high volumes of real estate investment.The Paris region commercial propertymarket in general thus offered a goodexample of positive leverage, with low inter-est rates and substantial capital appreciationduring the recovery period.

Considering private-sector involvement inurban regeneration initiatives, the MCAanalysis shows that companies which partici-pate actively in these areas in the Parisregion (notably in Saint Denis) are associatedwith those looking for the highest returns andinterested in speculative developments. Whilereturn on investment is considered as theprimary criterion by almost all participants,this factor is not sufficiently statisticallysignificant to discriminate the sample anddifferentiate the attitudes of property actorsin urban regeneration situations. Paradoxically,the results of our analysis show the absenceof any statistically significant difference



between urban regeneration involvement andtraditional property investment factors, suchas the anticipated rate of return which hastraditionally been widely used in the literature(see Adair et al., 1999).

However, one key factor in urban regener-ation less often encountered in the literaturebut tested in this analysis is the type of com-mercial risk borne. This is the most importantresult of the analysis. It is clearly apparent,both from the analysis and in the Saint Deniscase study, that there is a willingness on theprivate-sector side to invest in speculativedevelopments in urban regeneration initiat-ives. The study indicates that participants,particularly pioneer investors, in urban regen-eration initiatives favour speculative buildingassociated with high returns over a veryshort period. In contrast, investors who donot participate in urban regeneration generallyinvest in pre-let assets, over a longer time-period basis, while expecting lower returns.

With the structural changes in the Parisregion property market over the past decade,due to globalisation of both the economyand the property market and the major roleplayed by foreign investors, a new typologyof property actors is emerging and structuringthe property market. As an illustration, theinvestment holding period appears from ourstudy to be a more relevant variable in di-fferentiating the attitudes of property actorsin their involvement in commercial propertymarkets in general and urban regeneration inparticular. The main difference between themlies in the length of their involvement in themarket, and short-term and long-term inves-tor-developers can clearly be distinguished.The above results imply that regenerationinitiatives through property developmentsmust take into consideration the prospects forcapital appreciation seen from the investors’point of view. This raises the question, froman economic standpoint, of how the profit onthe operation is to be shared between the actors.

Also, short-term participants attach greaterimportance to participation during a downturnin the property cycle, when the prospects forcapital gains are the highest, principallyusing debt financing in their investment

decisions. These investors look for high-risk/high-return projects. During the 1997–2002recovery, in the context of the globalisationof commercial property markets and theexplosion of the property investment marketin the Paris region, property investment anddevelopment in urban regeneration initiativesstimulated counter-cyclical investment byshort-term foreign investors. Of theseparticipants in urban regeneration, 96 percent consider non-grant-based instrumentsas the most efficient way to encourageprivate-sector involvement in urban regener-ation initiatives. Overall, the results of thesurvey confirm that the nature and quality ofpublic infrastructure, which enhances thequalitative image of the areas and contributesto the value appreciation of developments, is afundamental investment factor for these par-ticipants. Despite the limitations of thesurvey and the small sample size, the findingsconfirm that the public sector has a key role toplay in providing equipment and publicfacilities on a long-term basis, whereas theprivate sector provides funding for the con-struction work, levering investment based onthe risk-return profile of regeneration projects.The Saint Denis plain case study demonstratesthat large infrastructure investment by the statehas changed the nature of the local propertymarket and has attracted private investorslooking essentially for quality of infrastructureand significant capital appreciation.

In conclusion, the evidence from the analy-sis in this paper is that investment returns forurban regeneration property can take theform of supernormal profits for pioneer inves-tors depending on the use of leverage, thelength of the investment time-horizon andthe stage of the property-market cycle.Although urban regeneration is a long-termprocess, it is essential that policy initiativestake these time-horizon and actor profilespecificities into account in their strategy.

References

ADAIR, A., BERRY, J., DEDDIS, B. ET AL. (1998)Accessing private finance. Royal Institution ofChartered Surveyors, London.



ADAIR, A., BERRY, J., MCGREAL, S. ET AL. (1999)Evaluation of investor behaviour in urban regen-eration, Urban Studies, 36(12), pp. 2031–2045.

ADAIR, A., BERRY, J., MCGREAL, S. ET AL. (2003)Urban regeneration and property investmentperformance, Journal of Property Research,20(4), pp. 371–386.

BALL, M. (1998) Institutions in British propertyresearch: a review, Urban Studies, 35(9),pp. 1501–1517.

BALL, M., LIZIERI, C. and MACGREGOR, B. D.(1998) The Economics of Commercial PropertyMarkets. London: Routledge.

BENZECRI, J. P. (1973) Analyse des donnees. Paris:Dunod.

BENZECRI, J. P. (1979) Sur le Calcul des tauxd’inertie dans l’analyse d’un questionnaire,Les Cahiers de l’Analyse des Donnees, 4, pp.377–378.

BERRY, J., MCGREAL, S. and DEDDIS, B. (Eds)(1993) Urban Regeneration: Property Invest-ment and Development. London: E. and F. N.Spon.

BOOTH, P. (2002) Le partenariat public–prive enGrande-Bretagne, in: CAISSE DES DEPOTS ET

CONSIGNNATIONS (Ed.) Partenariat Public–Prive et collectivites territoriales, pp. 109–132. Paris: La Documentation Francaise.

BOOTH, P. (2003) Promoting radical change: theloi relative a la solidarite et au renouvellementurbains in France, European Planning Studies,11(8), pp. 949–965.

BROWN, G. R. and MATYSIAK, G. (2000) RealEstate Investment: A Capital Market Approach.London: Prentice Hall.

CHINLOY, P. (1988) Real Estate: Investment andFinancial Strategy. Boston, MA: Kluwer Aca-demic Publishers.

DIV (DELEGATION INTERMINISTERIELLE A LA

VILLE—INTERMINISTERIAL DELEGATION FOR

URBAN AFFAIRS) (2000) The French urbanregeneration programme: 2000–2006. DIVPublications-Reperes, Paris.

DTZ FRANCE (2004) La regle du jeu: a guide to theFrench Property Market. Paris: DTZ France.

FLOYD, C. F. and ALLEN, M. T. (1994) Real EstatePrinciples. Chicago, IL: Real Estate EducationCompany.

GREENACRE, M.-J. (1984) Theory and Appli-cations of Correspondence Analysis. London:Academic Press.

GREENACRE, M.-J. (1993) Correspondence Analy-sis in Practice. London: Academic Press.

GUY, S., HENNEBERRY, J. and ROWLEY, S. (2002)Development cultures and urban regeneration,Urban Studies, 39(7), pp. 1181–1196.

HEALEY, P. (1991) Urban regeneration and thedevelopment industry, Regional Studies, 25(2),pp. 97–110.

HEALEY, P. and BARRETT, S. (1990) Structure andagency in land and property development pro-cesses: some ideas for research, Urban Studies,27(1), pp. 89–104.

HEALEY, P., DAVOUDI, S. and O’TOOLE, M.(1992) Property-led urban regeneration: anassessement, in: P. HEALEY ET AL. (Eds)Rebuilding the City: Property-led Urban Regen-eration, pp. 277–289. London: E. and F. N.Spon.

INREV (2004) Quarterly reports on Europeannon-listed vehicles. Amsterdam: INREV.

JAFFE, A. J. and SIRMANS, C. F. (1986) Fundamen-tals of Real Estate Investment. EnglewoodCliffs, NJ: Prentice-Hall.

JONES, C. (1996) Urban regeneration, propertydevelopment, and the land market, Environmentand Planning C, 14, pp. 269–279.

JONES, C. and WATKINS, C. (1996) Urban regener-ation and sustainable markets, Urban Studies,33(7), pp. 1129–1140.

LINNEMAN, P. (2004) Real Estate Finance andInvestments: Risks and Opportunities, Philadel-phia, PA: Linneman Associates..

LIZIERI, C. (2003) Occupier requirements in com-mercial real estate markets, Urban Studies,40(5/6), pp. 1151–1169.

MCGREAL, S. (2003) The role of real estate inurban development and regeneration strategies,in: Proceedings of the Fifth Sharjah UrbanPlanning Symposium ‘The Future of Citiesin an Uncertain Global Environment,pp. 314–326.

MCGREAL, S., ADAIR, A., BERRY, J. ET AL.

(2000) Accessing private sector financeregeneration: investor and non-investor perspec-tives, Journal of Property Research, 17(2), pp.109–131.

NAPPI-CHOULET, I. (1995) Pour une approcheimmobiliere et financiere des marches debureaux, Revue d’Economie Regionale etUrbaine, 3, pp. 481–500.

NAPPI-CHOULET, I. (1997) Les bureaux: analysed’une crise. Paris: Editions Adef.

NAPPI-CHOULET, I. (1998) The Paris officecrisis, Wharton Real Estate Review, 2(Spring),pp. 9–17.

NELSON, S. (2001) The nature of partnership inurban renewal in Paris and London, EuropeanPlanning Studies, 9(4), pp. 483–502.

Revue Urbanisme (2002) Urban regeneration inEurope, Hors Serie No.16, March/April.

TRACHE, H. and GREEN, H. (2001) L’interventiondes investisseurs prives dans des projets derenouvellement urbain, Les cahiers pratiquesde renouvellement urbain, 1.

TUROK I. (1992) Property-led urban regeneration:panacea or placebo?, Environment and PlanningA, 24, pp. 361–379.



The Role and Behaviour of Commercial Property Investors ... · PDF fileThe Role and Behaviour...

Documents

Transcript of The Role and Behaviour of Commercial Property Investors ... · PDF fileThe Role and Behaviour...