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French Departments: Record High Property Transfer Fees Expected in 2021 Unlikely to be Sustained

The evolution of French property transfer fees PTFs - "droits de mutation à titre onéreux" levied on real estate transactions has had a strong impact on departments’ operating performance in the last years by partly compensating for the continued growth in their social spending. This will be particularly the case in 2021 as DBRS Morningstar foresees PTFs to reach a record high. Looking at transactions so far this year, DBRS Morningstar estimates that their collective amount is likely to increase by at least 25% year-on-year. This would translate into more than EUR 14 billion of PTF revenue for French departments in 2021 compared with EUR 11.3 billion in 2020 or 14% of French departments' operating revenues. This represents a positive development for French sub-sovereign government finances in 2021, especially the departmental sector which faces structural budgetary challenges related to its social responsibility mandate (please refer to DBRS Morningstar’s commentary "Minimum Income Allowance Renationalisation in Seine-Saint-Denis is Credit Positive for French Departments" published on 30 September 2021).

Looking ahead, a slowdown or even a decrease in PTFs from their 2021 level is possible, given the unique situation this year. This includes the accommodative monetary environment, some households’ behavioral effects in terms of location preferences and higher savings that fostered an increase in property transactions. For French departments, an adverse shift in PTFs, particularly if coupled with further increases in social expenditure, would represent a budgetary challenge for the sector. PTFs also accounted for 5% of French cities' operating revenues in 2020 while French regions and intercity structures do not receive any PTFs.

Key highlights include:
• French sub-sovereign governments, especially departments, will benefit from a record year of property transfer fee proceeds in 2021, likely increasing by at least 25%.
• The growth of PTFs in the last years was driven by a greater number of transactions and to a lesser extent by higher house prices, strongly supported by reinforced mortgage affordability;
• Potentially less favorable mortgage access and funding conditions could limit PTFs’ growth, which would impact French departments’ operating performance going forward, as PTFs played a key counterbalancing role for high social expenditure growth in the last years.

“Monetary and macroeconomic conditions and their effect on the French housing market will therefore continue to remain key for departments’ public finances over the medium-term,” notes Mehdi Fadli, Vice President in the Global Sovereign Ratings Group.