Real Estate Investment: Why You Should Look to Mid-Sized Cities

Investing in major cities like Paris, Lyon, Bordeaux, or Marseille has now become less attractive than turning to smaller cities. It therefore makes more sense to focus on real estate investments in these mid-sized cities. Which ones should you target and base your investment strategy on? 

According to Bevouac, a specialist in turnkey rental investments in older properties, the slowdown in the 10 largest cities is likely to prompt real estate investors to change their strategy.

There are several reasons for this. The cities where prices have risen the most over the past 10 years (an average of +39.41%) are the ones where prices are falling the most today (-1.77%). Among them are Lyon, where prices have fallen by 8.1% year-over-year, Bordeaux (down 8.6%), Nantes (down 5.2%), and Montpellier (down 3.1%).
 

On a less macro level, Bordeaux is one of the most significant examples: while the price per square meter there has risen by 46.10% over the past ten years, it has been declining over the past year, with a decrease of 8.60%. In Lyon, the comparison is equally telling: a 40.40% increase in price per square meter over ten years versus a 8.10% decline over the past year.

Compounding this slowdown in the top 10 major cities is a sharp decline in household purchasing power, despite the reported price drops, as illustrated by Martin Menez, president of Bevouac: “For a household looking to buy a home in Paris with a net annual income of 120,000 euros, the maximum monthly payment is 3,500 euros; borrowing capacity has fallen from 731,000 euros in January 2022 to 552,000 euros today, and the size of the property they can afford has dropped from 70 to 56 m²… Paradoxically, the drop in prices therefore does little to encourage homebuying.” This comes as no surprise when you consider that the 20-year mortgage rate has literally quadrupled in the space of 18 months. “While over the past five or even ten years, the advice was to invest in very large cities, today the dynamics have completely changed,” confirms Martin Menez.
 

Winning Back Real Estate Investors in Mid-Sized Cities
 

This decline in the appeal of major cities marks the victory of mid-sized cities in the great real estate battle, with demand shifting to cities that are typically less sought-after, such as Angers, Saint-Étienne, Villeurbanne, and Le Havre.

Purchasing power per square meter in these cities remains attractive: prices per square meter have shown resilience. Better yet, the price per square meter has even increased in some cases, such as in Reims (where prices rose by +28.70% over 10 years and by +0.90% over the past year), Toulon (up 25.80% over 10 years and 8.90% over the past year), and Grenoble (up 29.90% per square meter over 10 years and 5.30% over the past year).
By comparison, while the average year-over-year change in price per square meter for major cities is negative at -1.77%, the average for the top 10 medium-sized cities over the past year is modest but positive (+0.51%).   
 

The Ideal Investment Profile for 2023

The rise in rental demand is linked to the supply of rental properties in France since January 2022, which has decreased by nearly one-fifth. In addition, many first-time homebuyers’ plans to purchase a home have been postponed due to the gradual disappearance of energy-inefficient properties from the rental market. These are all reasons to prioritize property purchases in mid-sized cities—and, more specifically, energy-inefficient properties, for which buyers can currently negotiate discounts of up to 15% off the asking price.

Another significant advantage of medium-sized cities is that there are no rent controls in these markets yet. This restriction applies only to cities located in high-demand areas. Furthermore, once a property has been renovated to meet energy efficiency standards, it can be rented out at a higher rate, which allows for a faster return on the renovation investment and, therefore, ensures optimal returns. Be careful, however, not to set your sights on cities where the price per square meter is too low; otherwise, the cost of renovation work will undermine the return on investment.