In 1997, for the first time since the beginning of the downturn, some activity returned to the French property market, as adjustments to a low growth, low inflation and low interest rate environment work their way through the economy.

The arrival in the market of Anglo-Saxon funds, and their advisers, has acted as the catalyst. Their interest was originally focused on portfolios of non-performing or distressed real estate loans, of which a number were available as a result of the wholesale reorganisation of the traditional banking sector. Over the year, however, interest switched to direct property purchase, principally on yield considerations, and major acquisitions by the Caisse de Dépots? et Placement de Québec, Blackstone, IIRO, ING and Codic have highlighted a rerating of the sector by international investors. On the back of this renewed interest local funds have been active again, and Crédit Agricole, Cross-roads (an international fund managed by French-quoted Unibail) and Société Foncière Lyonnaise, have all completed major investment purchases. German funds, previously noticeably absent, completed their first acquisitions late in the year.

In total, some Ffr30bn ($5bn) of investment transactions were completed during the year - a significant increase in activity. However, interest has been confined essentially to the central Paris office market with little attention so far to provincial towns. A number of major hotel transactions (George V, Plaza Athénée, Meurice) indicate that Paris is still a prominent centre of interest for international operators.

Under the influence of this renewed activity prices have begun to move off the low levels established though the recession. The recent negotiations for the sale of the Etoile St Honoré, a major office investment in the CBD, indicate that the 6% initial yield barrier may indeed have been breached for prime income-producing property. The fall in prime yields has been encouraged by the regular falls in French long-term rates, with 10-year OATS now at historically low levels.

Attention is now focused on the outlook for office rents in the downtown and La Défense areas, since these have fallen regularly over five years to their current levels of some Ffr2,800 and Ffr2,000/sq m. Economic recession and high unemployment have contributed to a high level of vacant space, particularly in secondary locations. Agents report however that the lack of new space coming onstream in the CBD market, particularly for major users, is contributing to upwards pressure on rents. There are signs that overall vacancy rates are already falling in prime locations. The first transactions were signed late in the year at headline rents of over Ffr3,000/sq m. Front-end tenant inducements have clearly reduced.

Retail rents in prime pitches have increased significantly during the year. The supply of available premises in proven locations is limited and a number of international retailers are seeking to establish a presence in France. The Loi Raffarin, introduced in 1996, is designed to reduce the development of further retail space both in Paris and in provincial out-of-town locations. This seems likely to contribute to increased competition for well-located trading space.

The upturn in interest in direct property investment has had a knock-on effect in the small quoted property sector. The wholesale reorganisation of control in this area as local investors restructure, coupled with increased interest in indirect investment by international groups, seems likely to ensure continued activity.

Alec Emmott is with Société Foncière Lyonnaise in Paris