Best French fund - Corem

Corem’s award as the best French pension fund is a tribute to its success in transforming a narrow assortment of residential properties into a highly diversified portfolio. This award is sponsored by Schroder Property Investment Management. In early 2003, as part of a shake-up of a previous scheme, Corem was presented with €250m-worth of legacy properties. Of these, 90% were old Parisian apartment blocks, some ground-floor shops, and a couple of office buildings.

Corem identified this portfolio as a single strategy investment, with a single source of yield, and a risk which was too concentrated.

This did not suit the fund’s objective of diversifying risk, nor its goals for financial return, and so after a global audit of the buildings, it was decided to sell the bulk of the portfolio.

The process was begun in 2004, and is now nearing completion. Some buildings were disposed of in their entirety, while others were sold apartment by apartment.

Corem then made the decision to diversify the real estate portfolio both geographically and in terms of sector. The goal was to consider investment opportunities across the Eurozone and in offices, retail and warehousing. Corem also wanted to increase the real estate allocation to 10% of the total fund.

However, Corem did not want to go it alone. So the fund engaged the services of real estate investment managers IXIX AEW Europe and their staff of 200 professionals.

By using the services of trusted advisers, Corem has been able to build a portfolio of tailor-made real estate projects.

IXIS AEW identifies opportunities which the pension fund assesses for risk, yield and other criteria.

If Corem decides to invest, a dedicated financial company is created to take control of the property (or properties) in question. Corem is then joined by a small number of other French institutional investors, normally big insurance companies and banking groups.

Each separate company usually takes on between 40 and 50% of debt in addition to the investment, in order to maximise the financial return.

This arrangement therefore gives Corem the ability to support projects which would otherwise be inaccessible.

An increasingly popular area of investment is the sale and leaseback of the head offices of major European companies.

For Corem, this arrangement is akin to buying a bond issued by the tenant company with a 12-year coupon and a yield of, say, 7.5%. This gives Corem an identifiable risk in terms of the stability of the tenant, the level of income over the course of the rental agreement, and the relatively low risk of capital loss. There is even a possibility of capital growth, if property prices have risen by the time the property is sold. Other sale-and-leasebacks involve entire networks of retail outlets. For instance, Corem owns a share in the premises of the Praktiker chain of DIY stores in Germany, Poland and Hungary. These sites were sold off by the company’s German parent METRO Group.

One of the risk management techniques available to Corem is the ability to identify the precise risk relating to a specific company across its entire portfolio. If Corem holds stocks or bonds for a company which is also a tenant in one of its properties, it can calculate the aggregate risk for that company. The pension fund sets limits on the total amount of risk it accepts for an individual company.

Each real estate project which Corem takes part in has at least €100m-worth of underlying assets - the biggest worth about €600m - and at least three partners. Some projects invest in a basket of properties, some in only one.

Other deals however are rejected because Corem considers them too expensive. It says there is a lot of competition now as more institutions are buying European real estate.

A chain of 250 hotels in France was considered not to offer a high enough yield, for instance.

But Corem says it is not prepared to take on extra risk to push up yields. For instance, it has rejected investment opportunities in eastern Europe with a higher-than-average yield because it does not feel comfortable with the existing legal and business environment, and also because it does not want to take on a foreign exchange risk.

Corem’s property portfolio is now much more diversified than before. At present, 60% of its investments are located in France, 12% in Italy, 7% in Germany, and smaller percentages in Greece, Hungary, Belgium and Spain.

In terms of sector, 60% of the fund’s property portfolio is in offices, 32% in retail (mainly in Germany and Italy), 7% in residential and a few per cent in warehousing, mainly in southern Europe.