Building a €1bn fund with a sustainable strategy

LaSalle Investment Management’s Uwe Rempis tells Nicol Dynes how active management and exhaustive research has paid dividends for its E-REGI fund.

A well-diversified core portfolio with a proven track record and strong sustainability credentials, unique investment characteristics and excellent performance. It might sound like an investor’s dream, but it’s the reality of LaSalle Investment Management’s E-REGI fund, which has just exceeded €1bn gross asset value and is expected to reach €1bn in assets under management by Q3, 2020.

We asked Uwe Rempis, managing director – KVG, at LaSalle Investment Management, Germany, a few questions about his investment strategy and the ‘secrets’ behind the fund’s success.

Last year E-REGI, your open-ended pan- European real estate fund, generated total returns of 10.9% and raised more than €200m in equity commitments, including five new institutional investors. How did you achieve this?

When we launched LaSalle E-REGI our intention was to create a diversified pan- European property fund with exposure to transparent markets in the strongest- growing city regions in Europe. Our

aim was to generate stable income returns through investments based on a quantitative model, the European Regional Economic Growth Index (E-REGI), which has been developed by LaSalle since 1999 and identifies the cities and regions across Europe that have the greatest economic impact and are the most promising in terms of demographics, urbanisation and technology trends.

We constantly analyse the geographical allocation, rebalance the portfolio to take out risks and redefine our strategy. We sub-divide our assets into three categories: supercore locations, with long leases; managed-to-core assets, which involve

repositioning and a willingness to accept shorter leases; and the core-higher-yield category, comprising assets with secure leases and strong covenants in sectors that deliver higher yields, like the logistics sector.

All these elements put together deliver outperformance. Reaching the €1bn threshold is a testament to the attractive and important investment proposition the fund offers to our institutional clients.

How important has active management been?

Active management has been essential. Last allocation. Alternative sectors like logistics have grown to 15% and will continue to grow. We started to reduce our exposure to the retail sector in 2017 and redefined our target allocation to 10-30%.

With retail investments it feels just about right. We keep looking out for repricing opportunities and good assets in strong locations, but I don’t think the percentage of retail in the portfolio will grow significantly.

Will the economic headwinds have a negative impact on the office sector?

There will be no decline in our office allocation, absolutely not. We believe there is still upside potential. Vacancy rates are at record lows for offices in Europe, prices have gone up mainly due to lack of product and there is room for rents to grow further.

‘There will be no decline in our office allocation, absolutely not. There is still upside potential.’

Uwe Rempis, Lasalle Investment Management

There are risks ahead, because of the slowdown in global GDP growth, the impact of coronavirus and so on, and the occupier markets will be impacted over time, but not this year, maybe in 2021.

However, the fact remains that supply is limited, the pipeline is manageable and demand is still strong. We will prolong debt arrangements with lenders, approach tenants proactively to prolong leases and create stability in the fund. For example, we turned one of our assets in Munich into a single-tenant property, which created great upside. Also, recently, we signed a nine-year lease in Paris, a single let at a rent that was nearly double the previous level, which will help drive further strong performance in 2020.

What is your forecast for the year ahead?

In 2020 we will continue to grow the fund, but with prudence. We will play with weaknesses and strengths to keep a diversified but well-balanced portfolio. We will remain focused on select investment opportunities in growth cities which we deem accretive to the fund’s target returns, but I don’t think we will invest over €300m like last year. Ours is a top-down, bottom- up approach: our strategy is always led by the research, but we have excellent teams on the ground and when they see opportunities we proceed with the acquisitions.

We expect to make further investments in Spain and the Netherlands, and we will keep an eye on Poland as the German logistics market extends there. We are also looking at the Nordics, Stockholm and Helsinki in particular, because I strongly believe our fund should be allocated there, but not in logistics, because the region is not in the same category of demand.

How and to what extent have you incorporated ESG into your investment strategy?

LaSalle tackled the subject a long time ago. Sustainability has driven our global standards and policies since 2008. We formulate a three-year strategic plan, approved by our Global Sustainability Committee, which gives portfolio guidance to all our funds, setting out short-term and mid-term objectives that the asset, property and facility managers must reach.

Our active management of the fund’s diversified core portfolio has enhanced the underlying properties’ sustainability credentials. The E-REGI fund has been awarded prestigious four-star rating by the Global Real Estate Sustainability Benchmark for the past two years in a row, as well as improving its underlying score year on year, reflecting our ongoing commitment to promoting ESG real asset performance.

How do you see things developing on the ESG front?

Stranded asset risk – the danger that buildings that do not meet ESG requirements will become obsolete during your investment period – is already looming large now. As legislation on ESG matters continues to tighten across Europe, you will be further penalised if you don’t take action. Action is necessary or your asset will be obsolete. It will be impossible to rent, sell or get financing for non-compliant buildings, so all fund managers must take ESG on board.

Technology is also essential: you must measure what you do in your buildings in order to manage them. Our Sustainability Management Programme collects all the relevant information on buildings, from energy consumption to waste so we can track our progress and we have experts working across countries and sectors to connect and compare data.

Digitalisation is the other big trend we see and we have internal teams tackling the issue actively and ambitiously at a local, regional and global level.

How does the European Regional Economic Growth Index incorporate ESG issues?

The index identifies growth regions but doesn’t currently mention sustainability specifically, although it takes into account wellbeing in the working environment, which is part of ESG policy. The human capital component of the index tries to measure the strength of the young and talented workforce going forward, finding out where they want to be.

We are also considering updating the internal tools we use when building the index in order to reflect major environmental issues such as climate change. This would mirror how LaSalle has incorporated the environment alongside demographics, technology and urbanisation in the proprietary ‘DTU+E’ criteria we employ when assessing individual assets.