What is the risk premium for real estate today?

The “risk premium,” also known as the “spread,” measures the difference—expressed in basis points—between two interest rates. This data is used to understand changes in the financing conditions of various countries, particularly within the eurozone. 

Consequently, the announcement of the dissolution had shaken investor confidence, and the difference between French and German government bond yields—the “spread”—had widened to over 85 basis points. It has since narrowed, reaching 70 basis points in early August.
 

Real estate investors also monitor the spread between risk-free bond investments—the 10-year OAT—and the expected return on their investment, as real estate is highly sensitive to interest rates. Currently, the OAT yield is slightly above 3%, and an investment’s spread is considered favorable when it falls between 200 and 300 basis points; the goal is to cushion against a potential rise in rates. 

However, the expected spread varies by asset class. For example, it will be 100 to 150 basis points higher for residential real estate, even though most investors expect the asset’s value to appreciate over time and find it easier to compare prices per square meter. There are several reasons for this. 

To begin with, it is highly dependent on wage levels and purchasing power. For this reason, it is currently experiencing a downward price cycle, even in Paris. Furthermore, in addition to a tax system commonly described as “confiscatory,” rent control and rent cap mechanisms leave landlords with only a limited margin. This is especially true given that these measures can be temporarily strengthened, as seen with the implementation of the “anti-inflation shield” and its corollary—the 3.5% cap on the increase in the IRL between the third quarter of 2022 and the first quarter of 2024. 
 

Commercial real estate, on the other hand, offers investors higher returns. While it is true that retail businesses are vulnerable to declining purchasing power, a prime location combined with a high-quality “brand” (such as major fast-food chains) and a long-term, fixed-term commercial lease ensure the investment’s long-term sustainability. 
 

The situation is different for commercial real estate, as the tenant of an office space is less dependent on the property than a retailer, who is bound by a commercial lease (involving the concept of business goodwill in this case) and whose location is strategic for generating revenue. Lease terminations may result from a space that has become unsuitable (too small or too large) or from premises that no longer meet users’ new requirements (ease of access, compliance with the Tertiary Sector Decree, fitness centers, etc.). 
 

In commercial real estate—whether retail or office space—the spread expected by investors ranges, depending on the location, the terms of the lease, and the building’s characteristics, from 150 to 400 basis points compared to residential real estate. 

Expert Opinion by Gérald Prouteau, Director of Development at Pierre Premier Gestion