MAGAZINE Primonial takes the alternative route

Having reaped rewards in the office and healthcare sectors, French asset manager Primonial is now betting on rental growth in the residential market with plans to build up a €4 bn European  portfolio.

Primonial’s place among the fastest growing real estate asset managers in France over the last few years is partly fuelled by its belief that yields would decline across all the principal property segments. With this conviction the group – traditionally more of an office specialist – decided in 2011 to venture into the niche segment of healthcare real estate. Expansion hasn’t stopped since.

‘We were mostly focused on offices at the time and created a lot of value in this sector,’ says Laurent Fléchet, Primonial Group's deputy CEO in charge of real estate.  ‘We were sure, however, that continued  yield compression would end our strategy and we decided to get into healthcare, which offered and continues to offer a higher level of returns. The intuition seven years ago that real estate yields would drop is part of today’s success.’

The care home sector represented a challenge both in terms of its operational component as well as the size of the market, Fléchet adds.  ‘In order to be successful in this sector you need two things, hire people who understand the operational side of the business; and second, reach a critical size quickly, which is necessary to give you the upper hand in negotiations with tenants.’  Against this background, the group hired operator Steva’s development head Yann Balaÿ a few years back to lead its healthcare business and started to expand aggressively across a number of European markets including Germany, France, Spain, Italy, Belgium, Austria and the Netherlands.

Over a seven-year period, Primonial Real Estate Investment Management has been able to amass a €5.4 bn healthcare real estate portfolio in Europe. Growth has been  largely driven by two massive portfolio acquisitions - the €1.24 bn purchase in 2016 of Gecina's healthcare arm, Gecimed, as well as the €1 bn purchase in the same year of the Panacea portfolio of 68 nursing homes in Germany. Earlier this year, the group also completed Europe’s largest healthcare property deal with the purchase of a 50% stake in a €1.63 bn clinics portfolio in Germany from Medical Properties Trust. The deal, involving 71 assets all let to Median on long leases, reflected a net initial yield of 6%.

While the pace of growth since 2011 has been remarkable by any standards, it is not expected to slow down any time soon, according to Fléchet. On the one hand, Primonial’s dedicated investment fund - Primovie - has been the single largest contributor in the group’s equity raising programme last year with over €800 mln of dry powder amassed over 2017. On the other, the French firm has just launched a new European healthcare and education property vehicle for institutional investors targeting a size of €1 bn.

Set up in partnership with Primonial’s German fund management arm AviaRent Capital Management, the European Social Infrastructure I open-ended fund plans to distribute an annual return of 5-6% and will focus on Europe’s largest markets. Germany remains on top of the investment list, says Fléchet. ‘We will continue to invest in the German market,’ he notes, ‘the sector is moving quickly and there is a strong need for new product.’

European scale
Primonial’s growth in Germany and on the continent in general is part of a strategy aimed at speeding up the real estate activities following last year’s entry of new shareholder, London-based Bridgepoint in the group’s capital. Supported by Bridgepoint, Primonial has announced plans to more than double total assets under management from 14 bn at year-end 2017 to roughly €30 bn by 2021. This would make it one of Europe’s top 10 property fund managers by assets under management according to research by PropertyEU. ‘We are currently in a position to raise some €2 bn of equity every year and to invest some €3 bn across Europe on behalf of our funds and other mandates,’ says Fléchet. The group will be managing roughly €19 bn of European real estate assets at year-end 2018, he adds. ‘By growing at a similar pace we should naturally come to manage €30 bn of assets by 2021. This is not exactly an objective for us, it is just what we have the capacity to do.’

While Primonial’s office business was almost exclusively focused on its home market, the recent push into healthcare has meant the internationalisation of its activities and the creation of a number of country-focused platforms in Europe’s biggest markets. These units – which are either fully-owned or held in joint ventures – are set to start developing their own products and clients in the medium term. They will also begin to be incorporated into the group’s portfolio under management from this year, says Fléchet. ‘We started with the launch of Primonial REIM in France, which manages vehicles both for retail and institutional investors. More recently, we began expanding across Europe with the launch of AviaRent in Germany and Codabel in Belgium and at present we are looking for a platform to take over in Italy.’ He continues: ‘Ideally we would like to have one regulated company offering pan-European investment solutions in each market as well as a strong local asset management team in the most important countries in Europe.’

In France Primonial recently took full control of its real estate investment arm Primonial REIM with the purchase of the 30.3% stake it did not already own in the subsidiary from Union Financière de France Banque (UFFB). Primonial REIM represents the bulk of the group’s real estate portfolio under management with roughly €14 bn of assets at year-end 2017. Fléchet: ‘Since its launch in 2011 the unit has experienced quite strong development thanks to our collaboration with UFFB. However,’ he adds, ‘UFFB was looking to divest its interest and we decided to take over while securing the relationship with them and making sure that the distribution channels will not change in the future.’ The €91 mln sale by UFFB was in line with a decision by parent group Aviva to exit the indirect real estate business and continue to be active exclusively through direct acquisitions.

In Luxembourg, Primonial set up a new real estate investment management platform in February of this year - Primonial Luxembourg Real Estate, headed by Fléchet. The unit – which targets both French and foreign institutional clients – has just started fundraising for its inaugural pan-European real estate investment fund and held a first closing for the residential-focused vehicle on 31 October. Fléchet: ‘The fund received the green light from local financial authority CSSF just over a month ago  and we have already secured some big clients in Europe.’  

Primonial European Residential Fund will follow a core-plus/value-add strategy and aims to distribute an internal rate of return of around 9% using ‘a reasonable level’ of leverage, he adds.  Geographically, it will mostly focus on residential assets in France, Germany, Belgium, Italy and the Netherlands, while taking a more cautious investment approach on Spain. The vehicle has just finalised its first investment as part of a partnership with Aedifica, purchasing two phases of 75% of a 96,000-m2 portfolio consisting of 71 buildings mostly situated in Brussels’ prime locations.

Although Fléchet declines to comment on the final targeted fundraising volume, he says the Primonial European Residential Fund is planned to ultimately hold a portfolio worth around €500 mln. ‘It is easier these days to raise equity than to invest in good product,’ the 53-year old manager says. ‘This is why for our first residential fund, we decided not to target a very large amount of equity but we preferred to be cautious and raise an amount which is in line with our capacity to find assets in selected markets where we have a local presence. We just want to make sure that for each asset we are paying a good price at the right moment. This will allow us to deliver capital gains within the next few years.’

Diversification strategy
The new residential fund is part of the group’s plans to diversify the portfolio further and roll out a housing investment strategy across Europe.  Primonial made its first meaningful acquisition in the sector last year with the purchase of a €430 mln portfolio in Marseille from listed firm ANF Immobilier. It recently said it is targeting a €4 bn housing portfolio across Europe. ‘We believe that there are considerable opportunities in the residential real estate market and our ambition is to become a leading player in this segment as well,’ comments Fléchet.

Residential assets currently represent around 8% of the group’s total real estate portfolio but are planned to grow to around a third of total assets in a three-year period. Meanwhile, offices have decreased their share of the total portfolio from around 90% in 2013 to 55% at year-end 2017. They are forecast to drop to a third of total assets in the future, with  healthcare properties making up the rest. Retail, on the other hand, will only play a very small part in the group’s business going forward, with Primonial considering any new investment in the sector ‘very selectively’ due to the ongoing restructuring in the retail industry, according to Fléchet.

Commenting on the new residential strategy, he asserts that the timing is ideal for such a move. ‘We believe the potential for rental growth in a number of places including Grand Paris, Berlin, Leipzig and Milan is much bigger in the residential sector than for some office submarkets and that the capital gains we can achieve from residential assets in these locations will be higher than what we could have had investing in offices in these cities.’ At the same time the yield spread between offices and residential – which used to be 200-300 basis points up to a few years ago - is now only 50-100 bps, he adds. ‘This situation offers a good opportunity for investors like ourselves to become a major player in this market.’


Personal profile
Laurent Fléchet currently serves as deputy Chief Executive Officer of the Primonial Group in charge of real estate. Since February of this year he has also headed the new Luxembourg asset management platform aimed at offering French and foreign investors a geographically-diversified exposure across the eurozone. The 53-year old manager started his career at Goldman Sachs’ Archon group where he was in charge of real estate management. In 2002, he joined Groupe Caisse des Dépôts’ lxis Aew Europe arm in the portfolio management department before being promoted to the management committee. In this capacity he was in charge of the management of the real estate portfolios of Caisse des Dépôts et Consignations as well as CNP Assurances. Four years later he took the helm at French fund manager Ciloger, which markets SCPI and OPCI investment vehicles through its parent companies Caisse d'Épargne and La Banque Postale. He finally joined Primonial in 2011 to lead the group’s newly created real estate investment management arm after the company received the green light from the AMF stock market regulator to manage SCPI investment vehicles.

Company profile
The Primonial group has changed owners several times since its founding in 1989. First a unit of merchant bank Robert Fleming & Co, then a division of US group JP Morgan, the group became part of the BNP Paribas group’s asset management arm in 2005. In 2010 it was taken over by its management team in partnership with Naxicap Partners, becoming one of the largest independent asset managers in France. More recently, the group has seen the entry of London-based private equity firm Bridgepoint as financial partner to support the growth of the business which reached over €23.4 bn of assets under management at year-end 2017. The group is currently owned by Bridgepoint (56.23%); Crédit Mutuel Arkea (29.85%); Management & Employees (13.26%); and the Alpha Oméga foundation (0.66%).

Real estate represents a major part of the group’s activities, or roughly two thirds of total assets. The property business is largely managed via the Primonial REIM subsidiary, which launched in 2011 as a joint venture with UFF Banque serving both the retail and institutional markets. Earlier this year the Primonial group took full control of the property unit with the purchase of UFFB’s 30% stake. With €14 bn of assets at year-end 2017, a figure which has since grown to €18 bn, Primonial REIM plans to boost total AUM to €30 bn by 2021.

Property assets under management - geographical split

France 75%
Germany 15%
Luxembourg/ Belgium/Italy/Spain 10%

Split by asset type

Offices 55%
Healthcare 30%
Residential 8%
Other 7%


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