With pricing stabilising at 5.25 per cent for the prime office central business district benchmark, the scarcity of opportunities in the Paris office market is forcing once conservative investors to consider non-CBD locations, according to Henderson’s Think/Europe report.

This is leading to keen pricing in some sub-markets – for example in St Denis prime yields have fallen to sub-6.5 per cent.

The next trend expected is for investors to seek opportunities further up the risk curve, probably acquiring assets with relatively short income security.

Henderson expects investors to acquire assets in established locations where grade A supply is likely to evaporate relatively quickly once demand recovers.

Ongoing limited speculative construction should lead to a lack of availability of good quality space, suggesting upward pressure on prime rents once the recovery in demand consolidates.

Securing a discount on short income producing assets may represent an option for investors who are currently priced out of longer income products. However, the report says this strategy will require a degree of nerve, since the short term outlook is relatively poor for the leasing market.

Henderson expects 2010 to be characterised by numerous lease re-negotiations due to past rapid indexation growth, combined with the recent sharp correction to market rental values.

Effective rental falls could be quite steep in some over-supplied sub-markets, particularly around the Southern River Bend and Northern Inner Rim.

However, Henderson believes prime rental growth will return to the market in 2012 and should strengthen rapidly in 2013 and 2014; hopefully justifying today’s keen pricing.

Typically offices have been the sector of choice for overseas investors, partly because retail is difficult to access and the French logistics market is not widely understood. Retail capital values on the wider IPD portfolio of French assets outpaced those in the office and industrial sectors between 1997 and June 2009, as a result of superior rental growth.

Performance for this sector will be under the microscope in 2010, however, because the consumer slowdown is forcing retailers to re-consider location strategies. Paying today’s keen prices to acquire assets in dominant locations may therefore prove to be a sensible defensive strategy as the risks are harder to quantify in secondary grade investments, the report says.

Andy Schofield, research manager at Henderson, says: “For the French office market, prime pricing has firmed across most locations within the Ile de France and the lack of available product is forcing investors to focus on grade A buildings with long income outside the confines of the traditional CBD.

“We expect that leasing market conditions in 2010/2011 will require investors to keep their nerve. However the short supply of quality space suggests that prime office rental growth will commence from 2012 and could be quite rapid thereafter.”