Investors have been struggling with their real estate allocations, but a new development should boost the flow. Richard Lowe reports

Many French institutional investors - the majority of which consist of retirement organisations and insurance companies, given that the pension fund sector in France is limited - are looking to increase their property allocations but are struggling because of the continuing growth in total assets.
"The trend of those players is to increase allocations to real estate," Pierre Vaquier, chief executive of AXA Investment Management, France, says.
Vaquier believes insurance companies are more often than not playing catch-up. Many are starting from a low level in the region of 4-5% and are struggling to achieve their target allocations, which are invariably closer to 7% or 8%.
"The increase in their assets and the increase in their liabilities mean they have a difficulty to catch up with their growth to generate the investments. They have been growing their real estate investments in terms of assets, but if you look at it in terms of allocation it remains stable."
Vaquier explains that the principal role of real estate investment is no longer seen as a hedge against inflation, as it was in the past.
Now they look at it as a diversifier from other asset classes, because of its low correlation with equities and bonds. They also look at it from a performance viewpoint. Over recent years, the performance of real estate has been pretty good compared with other asset classes.
"The trend is also not to do it domestically, but to do it on at least a pan-European basis and eventually a global basis," says Vaquier.
"In terms of the way they do it, I would say most of them are seeking direct investment when investing in the domestic market. French investors will very often buy French assets directly. But internationally, usually they go for funds; they take the indirect route and use pan-European funds created by the asset management industry."
Multi-employer pension fund UMR Corem, on the other hand, recently achieved its 10% target allocation to real estate after only four years of building its property portfolio.
For Vincent Ribuot, chief investment officer at the fund, real estate should act "very much like the bond portfolio", offering stable inflation-linked revenues on a long-term basis.
"We are trying to build a diversified portfolio of real estate assets," he explains. "That is to say, we are not looking to buy real estate buildings or offices just to see their value increase and to sell them back after a few years."
UMR Corem invariably looks to invest in large commercial centres or the headquarters of multinational companies in such cities as Paris and Frankfurt. More than half (55%) of UMR Corem's property investments are in France, with the remainder mainly in Germany and Italy.
"What we are trying to do is have a very long-term yield with a company. It should be the headquarters of a company or a big commercial centre, where we have a contract of more than 10 years, so we are sure we have a long-term yield."
Most important, UMR Corem's target allocation was recently achieved with the help of a vehicle that has only just arrived in France: the OPCI. The pension fund, together with partnering investors and asset manager AEW Europe, was the first to raise one of the non-listed, open-ended tax-transparent funds. Through this vehicle, UMR Corem and its partnering investors were able to purchase 255 stores worth €450m from French retail chain Casino.
"It was exactly what we were looking for," Ribuot says. "We now have a very closely inflation-linked revenue for the next 12 - maybe 48 - years linked in with what households will buy in their shops."
While OPCIs are certainly new - the enabling legislation having been passed at the end of 2006 - they are really a only a revised version of something much older: the SPCI.
SPCIs are non-listed open-ended funds which were heavily promoted in the 1980s, but which suffered when the French real estate market entered a downturn in the 1990s and investors experienced difficulty when requesting the repurchase of their units. The principal problem was that SPCIs had to gain consent from all shareholders before anything could be sold and this lack of liquidity discouraged further investment.
The OPCI - and a number have now been launched by various asset managers - is the result of a collective endeavour on the part of a number of players in the French real estate industry to establish a rival to Germany's successful open-ended funds, Spezialfonds, offering liquidity where SPCIs could not. For example, OPCIs are required to retain 10% of their assets in cash to cover redemptions, while also being able to hold a mixture of non-real estate assets in addition.
"It is a very modern instrument, because it allows you to allocate your investment depending on the real estate cycles," Vaquier says.
"You have the capacity not only to invest in real estate, but you can buy other types of assets. You can move allocations up to 49% in non-real estate assets. One of the dangers of an open-ended fund was to get capital at the wrong time in the market and to have an obligation to invest it. It is a very interesting feature and one that not many other funds in Europe have."
OPCIs also share a number of advantages with the listed, closed-ended SIICs (France's REIT equivalent). Unlike SCPIs, OPCIs are tax-transparent in the same way as SIICs and consequently are not be liable to corporation tax. They also benefit from the same capability to employ an UPREIT (umbrella partnership real estate investment trust) mechanism, which enables sellers to avoid paying capital gains while receiving the full value of the property in the form of partnership interest that pays quarterly dividends.
"OPCIs do have a number of advantages which they share with the SIIC," says Alec Emmott, principal at Europroperty Consulting.
"In particular, they get the same tax-advantageous treatment if buildings are contributed rather than purchased, which has proved very popular for the SIIC and a real source of new capital and new
products."
Emmott is unsure whether OPCI will be widely embraced by French institutional investors. "Could it work? Yes. Will it work? I don't know. It is still very early days and the amount of money that is actually involved at the moment is totally marginal."
Mahdi Mokrane, head of research and strategy at AEW Europe, believes there are a number of key issues, crucial to both the development and sustainability of OPCIs, that will have to be addressed if the new vehicles are to compete with SIICs.
"Depending on the outcome of the liquidity provisions they will have to abide with, OPCIs will have to optimise asset allocation and solve questions such as: ‘What's the optimal real estate investment mix between direct and indirect?'; ‘What's the optimal mix of liquid assets given expected returns/risks and correlations?'"
Mokrane explains that this "asset/liability problem" will depend on expected demand for liquidity by unit holders. "This is new in terms of real estate asset management, as it will force the OPCI manager to act more like a life insurance company finance director than a pure real estate asset manager!"

Valuers will also play a crucial role in the OPCI, Mokrane says. "Even if the liquidity provisions for the OPCI are not known yet, real estate assets held by the vehicle will have to be valued quarterly," he explains.
"This is not a very common feature in the French market and will have to be addressed by the valuation profession. It is expected that each asset held be valued and the report be consistently reviewed by a second valuer. This is certainly good news for the French market in terms of increased future transparency."
Etienne Stofer, chief executive at industry-wide PAYG fund for aviation industry employees CRPNPAC certainly sees the attraction of OPCIs. However, with CRPNPAC currently heavily invested in real estate with an allocation of 20% to the asset class, it will have little use for the fund.
"For obvious liquidity, diversification and regulatory reasons, we consider this percentage to be the maximum we may have in the asset class, and therefore we can only reduce that percentage in the long term, even if we still consider real estate as an interesting asset class," Stofer says.
"OPCI is a nice investment vehicle, but normally designed for investors who either want to reinforce their exposure to the real estate market or want to replace their direct asset and property management by using external skills. None of these two possibilities corresponds currently to us. Therefore, we have no plan in the coming years to invest in OPCI.
But Stofer admits that "in that field", CRPNPAC may not be "representative of an average institutional investor".
One institutional player that will be interesting to watch in the coming months is the French reserve fund Fonds de Réserve pour les Retraites (FRR). In 2006, FFR announced it was allocating 10% of its assets to alternative investments; in 2007, it completed its first private equity programme, followed later that year by a request for proposal on commodities.
FRR has made it clear that the next step in realising its new alternatives allocation is to launch its real estate investments, which the fund aims to do in 2008.
The fund is currently considering what kind of vehicle it should be employing to gain property exposure. It will be interesting to see if it follows UMR Corem's example and takes advantage of an OPCI.
Lastly, OPCIs may also play an important role in the recently reformed long-term company savings plans (PERCO). The investment period of these defined contribution schemes was changed from 10 years to "until retirement" in 2004, thereby creating a new core pensions product. PERCO schemes currently invest in equities, bonds and cash, but with total assets under management already €1.2bn as at June, 2007, property may have a role to play in the future.
And it is important to distinguish between the institutional OPCI and the retail OPCI that will be marketed by banking networks for the wider public. Mokrane certainly believes the latter has potential to attract retail investment.
"The advantage of the retail OPCI is that it is designed to be quite flexible in its asset allocation," he says. "This retail version is open-ended and thus appeals to retail investors."
And Vaquier sees no reason why OPCI cannot play a role in PERCO in the future. "This is a sector which has been developed recently, so the natural reaction of the managers, or the asset allocaters of those funds, is to initially concentrate on liquid assets such as cash.
"But as the industry is growing through funds of funds you will have people who will get real estate allocation. It is not to my knowledge done yet, but this is where an OPCI might be of use, because it is an open-ended fund."
It may well come to be "one of the contributors" to the success of OPCIs, he says.
Certainly on the surface OPCIs look to be excellent vehicles for French life insurance companies. However, unless regulations are changed, this is not an area that will develop.
As Aymeric Thibold, director of acquisitions at SGAM Alternative Investments Real Estate, explains, institutional investors are subject to registration duties when owning more than 20% of the fund. This becomes problematic and financially detrimental for investors that need to trade on a daily basis, such as life insurers.
"If an institutional investor owns more than 20%, it will have registration duties, even if they have already paid registration duties at [the outset]," he says.
"OPCI was quite interesting for life insurance companies as a package to put all their real estate investments in. But for now OPCI does not suit life insurance companies. They need to buy and sell every day to adapt the volume to their needs and therefore this double-registration-duty effect will bother the strategy of life insurance companies."
But Thibold expects the regulations to be changed in the future. "I am sure it is something that will be changed. When it is changed we will see new types of investors through the OPCI."

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