French public sector pension fund ERAFP is to increase its real estate allocation progressively from its current level of 4% this year, and is currently mulling adding infrastructure investments to the overall asset mix.
The fund – L’Etablissement de Retraite Additionnelle de La Fonction Publique – has been expanding its geographical allocation to property over the last year, most recently investing in Spain and the UK via AXA Real Estate.
Linda Yam, investment executive within real estate at ERAFP, told IP Real Estate: “ERAFP is allowed to invest up to 10% of its total assets into real estate, so we expect the real estate allocation to grow progressively close to this amount over the medium term.”
The pension fund – France’s second largest – first got permission to invest in property in 2011 in a decree published at the end of December 2010.
“Our initial target allocation to real estate was 2% of our total assets, but it grew progressively, and, for 2015, our target allocation is between 4% and 6% of total assets,” she said.
Yam outlined the type of assets the fund is currently targeting as is builds up its allocation.
“Our asset managers keep on looking for investments for us within the guidelines of our mandates – mainly core and core-plus strategies, diversified sectors with a bias on office and retail, but they can look at residential and alternative asset types,” she said.
ERAFP is not allowed to invest directly in real estate, and discretionary mandates have been awarded to external asset managers to invest in this asset class along SRI (socially responsible investment) lines.
The fund also had restrictions limiting asset allocation to 65% in bonds, but on 3 February these were amended by the French government and decreased to 50%.
It also opened up the possibility to allow direct lending to small and medium sized businesses, which the fund described as a “new stage” as it reaches its tenth anniversary.
Capital shifts to real estate will come from its 51% and 15% allocation to sovereign debt and European credit, respectively.
ERAFP’s first property investment was in 2012, when AEW Europe SGP bought an office building in Paris on the pension fund’s behalf, in which ERAFP is headquartered.
Since then, it selected AEW Europe to invest in French property and AXA Real Estate to invest in European property.
Following that, La Française REM was mandated to invest in France on ERAFP’s behalf in 2014, and LaSalle investment management was recently awarded a mandate to invest in Europe.
So far, investments have been made in France – mainly in the Paris area in office and retail – and in Sweden, Finland, Spain and the UK.
ERAFP’s geographical allocation within property is currently around two-thirds France and one-third Europe ex France, Yam said.
ERAFP is also now looking at real assets more widely, and infrastructure investment may come further up the agenda this year.
“We have been contemplating investment in this asset class (infrastructure) for a while, but haven’t done anything concrete yet,” Yam said.
“We may look into infrastructures more closely in 2015.”
The main challenge facing the real estate team at ERAFP right now is finding the right assets in a difficult market environment.
“At ERAFP’s level, the issue would be to be able to reach its target allocation with solid assets in a context where it looks like lots of capital is flowing into real estate and where economic conditions and outlooks are not positive everywhere,” Yam said.
Real estate is important for ERAFP, she said, for diversification purposes, as a long-term investment that matches the pension fund’s liabilities, and also as a way of producing a stable income with a premium over fixed income investment.
The capital appreciation potential and hedge against inflation the asset class provides are also key, she said
