As a relatively small entity, French pension fund Corem has nevertheless managed to replace its original narrow portfolio of residential properties with a highly diversified spread of commercial real estate.
Furthermore, it has done so by investing alongside other institutions in a number of custom-made financial vehicles which have given it access to projects it could not have pursued on its own.
It is this imaginative (and aggressive) approach which has earned it the accolade of Best Small Pension Fund in the IPE Real Estate Awards, an award sponsored by Citigroup Property Investors.
Corem is a relatively new pension fund formed from a previous scheme for civil servants, primarily teachers. The fund is now open to individuals across the board, as a third pillar scheme.
The €250m-worth of residential properties in Paris which Corem inherited in 2003 from its predecessor was considered to be too risky to keep, as there was little diversification, in terms of location and sector. In addition, the properties gave a very modest yield. Unwilling to take on the huge task of reallocation alone, Corem hired the services of IXIS AEW Europe, a sister company of the IXIS Group, one of the biggest real estate managers in Europe, and ultimately owned by Franch banks Groupe Caisse d’Epargne and Caisse des Depots. IXIS AEW is at present sourcing properties for Corem all over Europe.
The managers present possible buying opportunities to Corem, helping the fund to make assessments of risk and value, and calculating an appropriate price.
One of the qualities which distinguishes Corem from its peers is that it is not afraid to be selective. Corem says that during the hunt for investmenrt opportunities, it has seen a lot of different propositions which it has chosen not to pursue, because they have been overpriced or because the expected return was not high enough.
For Corem, building a long-term partnership with its advisers is vital, as the pension fund can then learn to trust what it is told.
The other important partnerships are those which it forms with other institutional investors. Corem says it is important not to invest alone as it is not a specialist property investor.
Real estate purchases are transacted using specially created vehicles, in which Corem invests alongside a small number of other institutions. The money invested is geared by an additional 40-50% debt in order to maximise the financial return.
Risk assessment is a big part of the investment process. Corem says that risk minimisation is one of the reasons why it always invests directly through projects with which it is well-acquainted, and never through companies acting as multi-managers.
Furthermore, Corem maintains a very accurate picture of the risks it is taking. It consolidates the risk of the corporate tenants failing to pay the rent with the risk involved in other investments connected with that company, such as stocks or bonds. Carrying out this exercise means that Corem is able to obtain a global picture of the risks it is exposed to across the different asset classes.
Its real estate portfolio is at present made up of a few per cent in the original housing stock (some of which might be kept) and in warehousing, with the rest split between offices (two-thirds) and retail (one-third). The aim is to increase the warehousing element to 15%, and possibly to increase the retail element as well.
However, there is no intention of increasing geographical diversification by investing in real estate outside Europe, as Corem does not feel confident about going outside its immediate surroundings. Instead, global diversification is achieved with stock market investing in other areas of the portfolio.
The pension fund says it is now looking for a current yield from its real estate portfolio of about 6 - 7%, which should increase if properties can be sold at a profit.
However, in 2004/05 the yield objective was 7 - 8%. Corem says the reduction in expectations is a result of more and more purchasers in the market, pushing up prices.
This is particularly true in the warehousing sector, which makes up just a few per cent of the pension fund’s real estate portfolio. Corem says these properties give a very high yield, but that it is very difficult now to find more prospects in this sector.
In fact, Corem says that it is expecting a decrease in yields in prime products across the board over the next few years, because of the increase in prices.
As at end-March 2006, the pension fund’s total portfolio was worth €4.2bn, of which the real estate portion was worth about €300m, with an underlying value (including debt and increases in market value) of around €550m. Corem says the ultimate objective is for real estate to make up 10% of its entire portfolio, which means it plans to invest another €120m.