EUROPE NEWS: France’s property push

European commentators like to typecast France as a civil servant’s paradise due to an alleged shorter workweek, longer holidays and enhanced pay of the typical ‘fonctionnaire’. That may be so, but real estate fund managers would be unwise to criticise them publicly. That is because the pension fund for the 4.7 million French civil servants will be kick-starting the selection of two property managers in 2012, PERE has learned.

In an interview, Olivier Bonnet, head of socially responsible investing at L’Établissement de Retraite Additionnelle de la Fonction Publique (ERAFP), said the pension plan is expected to publish two requests for proposals from property investment managers next year to locate assets for it to invest in. The first is likely to be a separate account mandate to buy real estate across France in all asset types, and the second mandate will be for a manager to buy assets across Europe.

By law, ERAFP had only been allowed to invest in bonds and equities. Since its creation in 2005, it has built up a portfolio of around €11 billion in assets, roughly divided 80 percent in bonds and 20 percent in equities, Bonnet noted. “Obviously, we want to diversify our assets under management and that is why we have launched these new mandates regarding real estate,” he said.

Indeed, ERAFP only recently decided to diversify into real estate. Last month, it dipped its toes in the water by selecting Paris-based AEW Europe on a separate account basis to acquire a Paris office property, stipulating that the first deal must not exceed a lot size of €40 million. However, the pension plan will need a larger market than just Paris to invest in, hence the need for a wider geographical focus and additional managers next year.

Though declining to specify how large each real estate mandate will be, given that its asset allocation for 2012 has not yet been validated, ERAFP is expected to invest around one percent of its current annual inflow of €1.5 billion in the asset class annually.

Importantly, any potential manager of a separate account with ERAFP will need to be up-to-date on socially responsible investing (SRI). Bonnet explained that the fund operates with a board of trustees that essentially are representatives of French civil servants and are nominated by French trade unions, all of whom are keen on responsible investing. As a result, when the fund was created in 2005, it was decided that investments had to comply with SRI policy. “The choice was not to replicate principles that had been adopted by older investors but to define their own according to their belief systems,” he said. “That is why we have such a focus on SRI policy.”

According to a resolution in 2005, the decision to be an SRI investor was unanimously endorsed by the board of the pension fund and was the result of a “broader reflection” on all aspects of the issues affecting such schemes. “The board of directors believes that investments based solely on the criterion of maximum financial profit fail to account for their social, economic and environmental consequences. In contrast, by making investments on the basis of the values it has adopted…the board intends both to promote the operations, companies, local authorities and states that respect these benchmark values and to exert influence to ensure that they are more widely applied,” it stated.

For the AEW Europe mandate, Bonnet noted that the guidelines were quite generic. However, for the next mandates, the fund will try to introduce more precise guidelines, he said, adding that they probably would be more stringent.

Bonnet stressed that there is no requirement for its managers to be French. However, for the first mandate, he noted that it was important for the manager it selected to have strong local market knowledge, so it might have been an advantage that AEW is based in Paris. For the pending mandates concerning France and Europe, asset managers from other countries will have an equal chance.

Of course, ERAFP could have chosen to be an investor in a larger club or fund-type structure rather than engineer a separate account. However, Bonnet explained that ERAFP wanted to be able to ensure its SRI policy would be adhered to, which is less possible when investing alongside other investors in a real estate vehicle.
In the future, the pension may need to change its way of functioning and try to invest alongside other investors as it seeks exposure to more property. In that case, ERAFP will need to try to define SRI rules that are more easily acceptable to other limited partners.

For the moment, however, the way forward is separate accounts. Having the pension fund for French civil service employees as a client would be a feather in the cap for most property investment managers, so the response to its request for proposals is likely to be strong. Nevermind what a foreign manager might think of the French civil servants themselves.