Allocations to real estate by institutional investors in France have been modest and diversification limited. But efficient REITs and the new OPCI have stimulated investment. Christine Senior reports

France is near the bottom of a league of nations for assets it has backing its pension system, since pay-as-you-go (PAYG) rules supreme, and only recently have efforts been made to encourage more individual savings for retirement.

The occupational schemes run by AGIRC ARRCO, although PAYG, do hold some limited reserves, as do some individual caisses de retraite.  The Fonds de Réserve pour les Retraites, the buffer fund for the social security pension, is another pool of institutional assets, worth around €30bn. Alhough it announced over a year ago plans to devote 10% of its portfolio to alternative assets, including real estate, to date there is no news of any planned real estate investments. But insurance companies are the biggest holders of institutional assets in France.

Figures from the French Association of Institutional Investors (AF2I) in its latest annual survey show that allocations for real estate amount to 5% of institutional assets under management. Some 45% of that is in office, 35% in residential, 10% in commercial and 7% in companies' own premises.

CRPN, the caisse de retraite that provides pensions for airline personnel, is unusual in having a fairly large allocation to real estate of 20%. Its penchant for property is because it is regarded as a safe investment.

"As a caisse de retraite we are obliged to have a minimum of 50% of reserves invested in assets that are more or less guaranteed," says Bruno Pages, CRPN's manager of real estate. "Real estate is not very volatile. Even at the low point of the cycle like today these are assets that are relatively safe, especially in the long term, and we have to invest for the long term."

All its property investments are directly held in France, almost exclusively in the Paris region, and the portfolio is split 60% in offices and 40% in residential. Pages says direct property investment is a long tradition for CRPN. It has the experienced personnel in-house to acquire, manage, upgrade and sell property when the time is right.

"We are aware that the profitability is improved when we do management ourselves and the buildings are better maintained," says Pages.

One feature of French institutions' investment is their appetite for owning real estate direct, for owning French property, and particularly property in the Paris region.

Insurance company Groupama's property portfolio, at around 7% of its total portfolio, is invested 75% in commercial property and 25% in residential - almost all in Paris or its suburbs. The company owns four landmark buildings on the Champs Elysées, as well as in other prime areas of Paris, where it says occupancy rates are high and rental yields are good.

In the past it has considered diversifying into other European cities, but rejected the idea. "We did a review of some funds for that, but we didn't find it appropriate," says Jean Louis Charles, director of investments at Groupama. "You have very high management fees for that kind of investment. Also the legal structure of the investment vehicle did not fit all our requirement in terms of regulation. Since this would have diversified up to 10% of our real estate allocation we considered it was not worth it because of the complexity."

By contrast Generali France has diversified. Its real estate portfolio has around 65% in offices, 9% in retail and 7% residential. It also has 5% in logistics, 1% in hotels and 14% in listed real estate companies.

Until a few years ago Generali was more traditionally allocated in offices and residential. Philippe Depoux, head of Generali Immobilier, said the company sold out of residential because of low yields and government constraints on the residential market through limits on rent increases and tenancy rules.

"The interest in real estate in France, and in Paris which is our case, is that you can rely on huge capital gains every 10, 15, or 20 years," says Depoux. "We sold massively out of residential because it's not high yielding and we made lot of capital gains through sales. We keep a bit of it because we want to keep knowledge of the product, and it's good for diversification to have 7% in residential."

Generali also invests in SIICs, the French version of REITs. Depoux says the reason for using SIICs was for the tax advantages, and as a way to gain exposure to unfamiliar segments of real estate.  "It's also good to have some of our money in something which is supposed to be liquid," he says.

Generali has also invested in the newly introduced structure, OPCI (Organisme de Placement Collectif dédié à l'Immobilier). One of its OPCIs is a sale-and-leaseback deal with a retail operation on the island of Réunion and another is a based on logistics. It is currently in discussion with other investors for a third OPCI to buy distressed properties.
Charles is less enamoured of the OPCI concept. He finds the tax regime unfavourable. "It makes no sense for us to manage our buildings through OPCI because it will be costly for us," he says.

Viveris Real Estate Investment Management has created several OPCIs for French and foreign institutional investors in OPCIs' first year. Although the structure comes in two formats, one designed to appeal to private investors and another for institutions, it is the latter where most interest is expected. Their attraction is flexibility and tax efficiency.

"For institutions you are quite free in your investment strategy, you can build a very diversified portfolio in terms of sector, assets or a single asset," says Fabrice Lombardo, a director at Viveris REIM. "We feel today it's a pretty new tool and for institutional investors it's becoming more and more evident that they should use this tool. I think it will become the main investment vehicle in France for real estate in the coming years."

Before the arrival of OPCIs, institutions mainly used the SCI (Société Civile Immobilière) structure, which is subject to tax. "It lacked flexibility," said Lombardo. "In the old structure institutions tended to keep and never sell assets because of the problem of capital gains tax. The real benefit of OPCI is you can actively manage your portfolio."

Next year could see a rise in investment in real estate by insurers, says Jean Paul Dumortier, head of the French Real Estate Association. "What I expect in 2009 is a positive flow from insurance companies, maybe between €3bn-5bn, because they have interrupted their investment since 2006-07 because of the increase in prices through the entry of new investors like highly leveraged opportunistic funds."