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Find the JNI Interview of Marc Bertrand, CEO of La Française REM

30 November 2017

How are you positioned in real estate? Of the EUR 64 billion that La Française has under management, EUR 15 billion is invested in real estate.

Half our clients are institutional investors (two-thirds French, one third international) and the other half are French retail clients investing via collective real estate investment vehicles. We mainly invest in office property (two thirds of AUM) but we also have commercial assets (one quarter) and the rest is in residential and other sectors (logistics, hotels, etc.).

In France, we are 50% exposed to the Paris region and 50% to the provinces. In 2017, we invested EUR 2 billion in France and the euro zone. This substantial long-term commitment means we are invited to tender for all major projects in the market.

Our real estate investment arm is managed by a 140-strong team, of whom 120 are based in France, 15 in Germany (Frankfurt), and 5 in the UK. 

How do you see the European market?

Overall, our investments are 80% French with the remaining 20% mostly in Germany and the Benelux countries, and to a lesser extent the UK and Ireland. Over the last three years, we have used our presence in the German market to launch three collective real estate investment vehicles covering the whole of Germany, which have been enthusiastically received by French retail investors. 

Today, we see the market in real estate investment management going through an intense process of diversification. Diversification has been made necessary partly by the rising volumes of inflows. Investing elsewhere in the euro zone does not bring any great change in returns as yields in Europe’s major cities are broadly comparable, ranging from around 3.70% to 4.50%. However, it allows us to take positions in markets at different stages of the economic and rent cycle, which vary considerably from country to country. The UK, for instance, is at the peak of its cycle, Germany is still in a growth phase and in France rents remain low but growth prospects are clearly improving. 

Have you noticed any Brexit effect over the past year?

First, we need to remember the context. The London market bounced back relatively fast after the financial crisis and was recently yielding low returns on very high rents. This cyclical rally prompted a surge in the construction and delivery of new buildings between 2013 and 2016. At the same time, however, Brexit incentivised certain companies to leave the country resulting in a simultaneous drop in demand. Plentiful offer and stuttering demand means the London market is close to a turning point. The new factor is that Brexit uncertainty is making investors more cautious and this will not help any rapid rebalancing of the market.

How can an investor diversify his or her portfolio while remaining within the French market?

Investors should ask themselves which of the major French cities outside Paris have a prospering economic activity, developing infrastructure, etc. This requires an analysis of “metropolization”. Lille is a good example and has potential. Just one hour from Paris and only a quarter hour more from London, it has made the most of its location. The urban renewal projects in the metropolis are very promising. Similarly, Bordeaux and Nantes, two towns with good TGV services offer excellent opportunities in their town centres. Conversely, Rouen and Orleans, although only an hour from Paris, have seen part of their economic activity sucked out by the Paris region.

An analysis of these different markets involves analysing the towns’ development policies. Specifically, we need to look at the team in charge of urban development across the whole urbanised area. In this respect, Lyon is the model to follow. Its urban community policy sets it apart in the market, notably as regards business real estate. In terms of dynamism, it is easily the equal of European cities like Milan or Dusseldorf.

What opportunities will the Grand Paris project bring?

This is an ambitious and high-quality urban project that will nearly double the transport infrastructure around Paris. Some zones in particular should benefit well from the massive investment involved, such as Saint-Denis Pleyel, which will get a giant rail station, an interconnection on the same scale as Paris St Lazare.

However, we reckon that the Grand Paris project currently has a glut of office development, particularly around second-string stations. In these zones, we would rather invest in housing developments where demand remains strong. This rebalancing is necessary but still tricky for the municipalities for which residential development inevitably entails major investment in public infrastructure with little in the way of additional resources to fund it.

What about sector diversity?

Investors have numerous options. They should keep in mind that social and demographic trends drive demand for buildings. Therefore, we see interesting opportunities in student or young worker residences, tourist accommodations, non-medical senior homes for people who are still independent but looking for leisure services and EHPAD-style dependency homes for seniors. True, none of these asset classes offer very high returns, but the cash flow is highly visible and very long-term. 

Are you investing in connected buildings?

It is obvious that these days, any building that is not connected, in other words a building where Wi-Fi and mobiles do not work, is not going to be let. But this is only the tip of the iceberg. Recent buildings include highly sophisticated building management systems (BMS). I note with a degree of amusement that there is still a big mismatch between the way buildings are built and the way they are used. For instance, a consultant might rate the energy consumption of an office building at a very different level from what it actually consumes when occupied. You have to make sure the technology in place remains within the reach of users. If they do not understand the technology, people try and improvise which generally proves pretty costly in energy terms.

We also see a rapid change in the use of spaces and services within office buildings. Company restaurants are no longer canteens but have become living spaces, used all day long, with creative decor and a convivial atmosphere that better suit the way companies are organising themselves and working now. A single space can therefore serve multiple uses. This is the biggest change we have seen. Going further, beyond this approach of optimising space usage, we are seeing new living spaces appear: a vegetable garden in the courtyard, a gym on the ground floor, a music room, etc. These new services come with an operating cost and we have found that only significant-sized buildings can absorb these new expenses. Streamlining and developing these services in a way that makes them accessible to smaller buildings is a key issue for managers like us. 

Are investors including new sustainability criteria in their demands?

Generally, the bigger the investor the likelier they are to take a mature approach to SRI. Demand for reporting on SRI criteria is on the rise, driven by new regulations. Today, for a northern European investor it is unthinkable to invest in a non-SRI asset or fund. Small investors take a different approach. Not that they are in any way opposed to SRI, but they are waiting for clear proof of the economic case. It is our job to explain the virtuous circle created by renovating buildings to the new standards. Such renovation means they can be let faster and sometimes for higher rents. Tenant demand for buildings that are compliant with new standards is also pushing the market forward much faster than legislation alone could have done.

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