Down And Out In Paris Real Estate

Paris tax accountant Martin S. Sigman had been looking for a new office until his landlord made an offer not to be refused. He cut Sigman's monthly rent of $7,800 by an amazing 25%. "It's really a renter's market," says a delighted Sigman.

And how. The Paris crisis in commercial real estate that began three years ago simply won't end. And behind every tenant who's enjoying a rent cut, a French lender is hurting badly. On Feb. 28, one big bank, Compagnie Financire de Suez, announced a stunning write-off of $1.5 billion in weak real estate loans. As a result, the bank reported a $913 million loss for 1994, while its stock fell nearly 8%. There's even speculation in Paris that the job of Chairman Gerard Worms may now be at risk.

"THIS NIGHTMARE." Yet the Suez move may set off a trend among French banks. Some Paris financiers hope that it will encourage the banks to face up to their problems and do a wholesale write-off of weak loans on Paris office buildings. Until now, most banks have been provisioning against the loans in dribs and drabs. But worries over bank realty problems helped push the Paris Bourse down 17% in the past year. "I hope other banks follow the Suez example and get rid of this nightmare once and for all," says one Paris banker.

It's no surprise that the 1992-93 recession caused a property crunch in most European cities. But in France, builders and lenders were slow to deal with it because they were accustomed to ever-growing Paris property values. They figured that France's economic upturn would soak up the overbuilding of the past--back when builders thought European union would draw droves of foreign companies to Paris.

But Europhoria has dimmed, France's upturn is modest, and the empty-office overhang is huge (chart). "There's a sober realization that the market isn't recovering," says R. Scott Bugie, bank analyst at Standard & Poor's Corp. in Paris. Some rents and sales values have fallen by half since 1990.

More big write-offs by lenders are on the way. The biggest French bank, state-owned Credit Lyonnais, is likely to dump a major chunk of its realty portfolio into the government's hands as part of a broader bailout for this struggling institution. Less fortunate banks such as privatized Banque Nationale de Paris must swallow bad loans themselves. A big state-owned insurer, Groupe des Assurances Nationales (GAN), has warned of a real estate write-off approaching $500 million.

For now, no French lender faces collapse, but precious capital will be needed to shore up shaky balance sheets. Compagnie Financire de Paribas recently pumped $150 million into two development subsidiaries to cover their 1994 losses. Further losses there are likely this year, because the purpose of the cash infusions is to carry land acquired for stiff prices in the 1980s that can't be built on until the office market improves.

EMBARRASSING. Meanwhile, write-offs could also set back French plans to privatize insurance companies. AGF was to be privatized soon, but a weak market has put that off. Shares of insurer UAP, privatized a year ago, are selling 21% below their offering price. "That's really an embarrassment for the French government," observes Roland Andreasson, an analyst at Lehman Brothers Inc. in London.

And although offices are the big problem, French housing is also weak. France's biggest homebuilder, Compagnie Immobilire Phenix, expects to report a 1994 loss of more than $300 million. That will wipe out its equity. Its 51% owner, conglomerate Compagnie Generale des Eaux, must buy out minority shareholders and ante up fresh cash.

Some real estate experts see an upturn after France's May 7 presidential election. Political jitters affect both tenants and buyers, they argue. With office buildings cheap, "this may be the moment to buy for institutional investors who can take a bit of risk," says Thierry Dormeuil, deputy financial officer at Paribas. Some prestigious buildings that sold for $23,000 a square meter a few years ago can be had now for $9,500 or less, he says.

That's a bargain, perhaps. But there's no reason to rush. Paris should have plenty of buildings up for grabs before its property crisis ends.

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