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Interview with Alexis Bossard; manager of the real estate fund CM AM Pierre at Crédit Mutuel Asset Management.

Could you remind us of the DNA of your fund?

The CM AM Pierre fund invests in listed real estate in Europe (Société d'Investissement Immobilier Coté - SIIC-). The investment universe comprises 150 stocks listed in Europe. These are mainly real estate companies (companies with real estate assets and receiving rents) which offer a very broad range of diversification: Residential, logistics, offices, sales, but also niche investments such as movable guards, data centres, healthcare facilities, hotels, etc. Property developers can represent up to 10% of the fund. In order to build the portfolio, we select stocks with good quality land assets and a discount or valuation potential. Usually composed of 40 to 50 stocks in the portfolio, the CM AM Pierre fund is rated 5 stars1 by Morningstar. The quality of its performances2 was distinguished by three Refinitiv Lipper Fund Award, ranking it in first place, in the following countries: France, Germany and Austria.

In contrast to other ‘paper stone’ vehicles such as SCPI or OPCI, CM AM Pierre is a diversified and liquid asset as it is an equity UCI. This liquidity gives it a dual advantage: unit holders can subscribe and sell their shares at any time, and management can engage in cross country arbitrage, from property to property, to capture the momentum of the most attractive markets in Europe.

What happened at the beginning of 2022?

After a solid 2021 and a +18.31%3 rise for the listed real estate sector (FTSE European Public Real Estate Association Index), 2022 looks set to be a complicated year for the moment. Not only is the US rate hike mechanically weighing on the sector, but the invasion of Ukraine accentuates volatility and the markets fall. No geographic sector or segment is spared. For example, residential real estate (35% of the CM AM Pierre fund) has corrected by nearly 10% since the beginning of the year and now shows a discount of over 20% of the value of its underlying assets. This is also the case for logistics and office and commercial property which held up quite well in January but which has dropped between -10% and -20% since the beginning of the year. Finally, among other property assets that we like: The furniture segment also declines by almost 15% while occupancy rates and rents per square meter are at their highest.

Any major portfolio shifts ?

Given the geopolitical uncertainty and lack of visibility, we have not made any major arbitrages. We confirm our long term conviction of logistics and residential. One for its growth profile with the rise of e commerce and last kilometer delivery, the other for its defensive profile and which has the dual advantage currently of being ‘growth’ (rents indexed to inflation) and ‘value’ (20% discount on Revalued Net Assets). On the downside, we increased our exposure to Paris office sector via Gécina, whose discount to NAV above 30% seemed unjustified.

Interest rates are starting to rise, what is the near term impact on the valuation of the sector?

Over the last 15 years, interest rates have clearly benefited listed property companies. On the one hand, the fall in bond yields has driven up valuation levels and on the other hand, the decline in their financing costs has clearly been the main lever for earnings growth. Regarding rate hikes, this penalises the sector in the short term (sector rotation) but we are very confident about the fundamentals and the medium to long term prospects of listed real estate. In effect, we think that a sharp rise in interest rates is not on the horizon tomorrow, given the explosion in debt, but will only occur slowly and only if inflation resumes, causing rental values to rise. In that case, inflation in rents would take over from lower funding costs.

Could tighter regulation of CO2 emissions adversely affect the profitability of the real estate sector?

On the contrary, real estate companies are generally at the forefront of issues related to renovation and energy efficiency compared to the entire property market. On the ESG side, any tightening of regulations should encourage demand for and investments in eco-friendly assets that land owners or large investors hold.

What are the industry's growth prospects?

The listed real estate sector, though defensive, is not risk free and suffers from the war related volatility in equity markets. Nevertheless, the sector has good growth prospects and a good entry point, in our view. Rent indexing, a more than 20% discount to German residential asset valuations, demand for less energy intensive buildings and the growth potential of logistics rental demand are all arguments for the recovery of listed real estate values.

Completed on 07/03/2022

(1) Source Morningstar Feb 2022, Indirect European Real Estate Equity Class. Definitions and methodologies available at www.creditmutuel-am.eu

(2) 3 Year Performance as of 31/12/2020, Equity Sector Real East Europe Category. Lipper's quantitative and exclusive methodology.
References to a ranking, price and/or rating are not indicative of future results of the latter/fund or the manager.

(3) Past performance is not a guide to future performance

The reference to certain values is given for information purposes. It does not aim to promote direct investment in such instruments and does not constitute investment advice.
Cm AM PIERRE is exposed to the following risks: Risk of capital loss, equity market risk, industry risk, risk of investing in small cap equities, risk of investing in emerging markets, currency risk, risk of convertible bonds, interest rate risk, credit risk, risk of the impact of techniques such as derivatives, legal risk, operational risk, counterparty risk.
Document for professionals. The information contained in this document does not constitute investment advice and is available to you free of charge. Investing in a fund may be risky and investors may not get back the amount invested. This fund is managed by Alexis Bossard, manager at Crédit Mutuel Asset Management, a management company approved in France by the AMF under number GP 97-138, a société anonyme with a capital of euros3871680. Registered office and offices Paris: 4 rue Gaillon 75002 Paris, Bureaux Strasbourg: 4 rue Frédéric Guillaume Raiffeisen 67000 Strasbourg, RCS Paris 388,555,021 - APE code 6630Z, intra Community VAT: FR 70,388,555 021.Crédit Mutuel Asset Management is an entity of Crédit Mutuel Alliance Fédérale. The fund may not be sold, advised for purchase or transferred by any means whatsoever to the United States of America (including its territories and possessions) or directly or indirectly benefit any US Person, including any natural or legal person, resident or established in the United States.