INTERVIEW with Alex Bossard, manager of the CM-CIC SICAV's CM-AM Pierre sub-fund at Crédit Mutuel Asset Management.
Crédit Mutuel Asset Management
Can you tell me a little about 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 securities listed in Europe. It includes mainly real estate companies (companies that own and rent real estate assets) but very widely diversified: residential, logistics, offices, commercial, as well as niche investments such as storage and data centres, healthcare facilities, hotels and more. Real estate developers may account for up to 10% of the fund. To construct the portfolio, we select securities that have high-quality assets and are either discounted or have upside potential. The CM-AM Pierre fund usually contains 40-50 portfolio positions and is 5-star rated1 by Morningstar. The fund's performances2 have been recognised by three first-place Refinitiv Lipper Fund Awards in its category in the following countries: France, Germany and Austria.
As opposed to other real estate investment vehicles such as real estate investment companies (SCPI) and real estate collective investment undertakings (OPCI), CM-AM Pierre is a diversified and liquid fund because it is an equity undertaking for collective investment (UCI). This liquidity gives it a twofold advantage: shareholders can subscribe and redeem their shares at any time and the investment manager can switch from one country to another, from one real estate company to another, in order to tap into the most attractive markets in Europe.
How did the CM-AM Pierre fund react during the health crisis?
During the health crisis, when the European economies ground to a halt, listed real estate was also affected by the fall in stock markets during Q1 2020, even more so given that its defensive nature was limited by lockdown measures (loss of rent payments, offices vacated, etc.), which adversely affected certain real estate assets (commercial premises, hotels). We rapidly adapted our portfolio and we significantly reduced our exposure to these commercial and hotel segments. These segments were reduced from 7% in March 2020 to less than 2% of the portfolio a month later, and have remained stable since. On the other hand, we increased our residential and logistics (delivery and storage spaces) holdings for their defensive qualities and visibility. Residential because it meets a basic need: accommodation and logistics, since the surge in online sales during the lockdown periods boosted demand from distribution companies. In addition to traditional storage spaces, these companies now want to establish distribution platforms near cities to deliver products ordered online as quickly as possible (last mile logistics) These segments, which were already benefiting from favourable structural trends, have been further boosted by the impact of Covid. As a result, residential and logistics now account for 60% of the portfolio. CM-AM Pierre therefore hit a low point in March 2020, before redressing the balance in early July and ending the year3 at +5.65%, compared with -9.98% for the FTSE EPRA (European Public Real Estates Association), its ex-post benchmark.
How has the asset class behaved since the beginning of the year? What are your main convictions?
The abundance of liquidity from stimulus packages and a potential return to normal life are driving markets to new highs. In this context of sector rotation, listed real estate is underperforming even though its upside potential remains intact. The German (30% of the portfolio) and Swedish (about 20% of the fund) markets remain our primary convictions because the effects of COVID-19 were limited. These are the markets where the combination of rental income growth and upside potential in the value of real estate is the strongest. The main holding of CM-AM Pierre is Vonovia (market capitalisation of €30 billion). It owns just over 350,000 residential apartments in Germany, which represent 85% of its assets, while the rest are in Sweden (10%) and Austria (5%). With a development pipeline of 3,000 new units per year and external growth transactions, Vonovia has generated solid rental income and valuation growth year after year. Residential real estate is also increasing in value due to Nordic assets. With prices per m² hitting new records in Sweden (+8% in one year), residential real estate companies such as Balder and K-Fast, which are among the top 10 assets in the portfolio, are outperforming. In niche investments (18% of the portfolio), we favour the Scandinavian company SBB (Samhallsbyggnadsbolaget I Norden AB), a real estate company specialising in social services; most of its properties are rented to high-quality tenants, such as primary and secondary schools, police stations, retirement homes, hospitals and public housing. Finally, although we took some profits recently, logistics still account for 18% of the fund, with in particular the French company Argan (7% of our portfolio).
Real estate assets are resilient in times of crisis. The sector will profit from new trends such as increasing urbanisation, widespread teleworking and the ageing population, which will allow some real estate assets to perform well. With returns above 4% for the sector compared with risk-free rates close to zero (OAT 10 at 0.10%), the sector has strong upside potential.
Interest rates are beginning to rise; what is the short-term impact on the sector's valuation?
Over the past 15 years, interest rates have clearly benefited listed real estate companies. On the one hand, the decrease in bond yields has pushed valuation levels higher and, on the other hand, the fall in financing costs have clearly been the main factors driving profit growth. Regarding the rise in interest rates, this will make the sector less attractive in the short term (sector rotation), but we are very confident in both the fundamentals and long-term outlook for listed real estate. We do not expect rates to rate sharply overnight, given the explosion of debt; in our view it will happen slowly and only if inflation takes off again, leading to an increase in rents. In that case, rent inflation will take over from reduced financing costs.
What is the sector's growth potential?
The listed real estate sector, while defensive, is not without risk and will suffer from volatility on equity markets. We think that the growth potential remains intact, particularly as regards the logistics and residential segments. With a discount of more than 10% in relation to underlying assets, this market seems to currently offer a good entry point.
Completed on 31.05.2021