FRANCE - French pension funds have shifted away from the local real estate market in recent years, seeing too many management constraints linked to the asset class and a relatively poor return on investment.

In spite of a recent study published by real estate analyst Investment Property Databank (IPD) showing that the French real estate sector was one of the most dynamic in Europe, with a return on investment of almost 10% in 2010, several French pension funds have been reluctant to invest in the market.

Those institutional investors have reduced the size of their real estate portfolios in recent years.

In its 2010 annual report, the pension scheme UMR-Corem said it had reduced the size of its real estate portfolio after a period of over-exposure. It has readjusted its portfolio to meet the target originally planned - roughly 10%.

Another big French pension fund, which has asked not to be named, has reduced the size of its real estate portfolio from €200m to €3m over the past decade.

Pierre Popesco, head of real estate at law firm Herbert Smith in Paris, told IPE: "Most of the time, the decrease was made naturally. Many pension funds have sold their real estate assets during the crisis to compensate for the loss made by their investments in other asset classes such as equities and bonds."

He said French pension plans have decided to prioritise those two asset classes in which they traditionally invest, seeing better prospects in terms of return on investments.

Charles-Antoine Roger, senior consultant at Mercer France, said: "We have seen an interest from pension funds for alternative asset classes, including emerging markets and infrastructure over the past few years.

"However, these investors keep their focus on assets they know and are now seeking to invest more in private bonds."

URM-Corem said in its annual report it was still looking to buy several assets, but would remain particularly aware of the constraints linked to real estate.  

Pension funds in France and further afield have become more demanding since the financial crisis, looking at several criteria - such as construction quality, location, strong leases and prices - before investing in properties.

Those conditions have been amplified with new regulation coming into the market such as Solvency II and Basel III, which have made investors more reluctant to take risk.

French pension funds have also justified their decision to reduce real estate allocations by the fact the market is highly fragmented.

Rocher said: "Investors now have to decide whether they want to invest in offices, commercial or residential properties. Each of these sectors presents different skills, competencies and issues that pension funds have to take into account before investing."