La Française’s Rendall sees cost escalation above 10% per annum

The managing director at the Paris-based asset manager says investors should be re-underwriting business plans to fit the current inflationary environment.

Rendall: strong partner covenants will increase in importance

La Française Real Estate Managers, the real estate investment management arm of Paris-based asset manager La Française Group, says that it is witnessing development costs rising by more than 10 percent on average to counter current inflationary pressures, managing director David Rendall told affiliate title PERE.

As a consequence, he said the asset manager, which has €29.6 billion of real estate assets under management, expects to be more focused on underwriting and understanding where there might be supply and logistics constraints and inflationary pressures. This will help to ensure that fixed price contracts were realistically achievable for the firm’s institutional and retail investors, Rendall explained.

“All of our clients are asking the same questions. They are most concerned with interest rates, the supply side, cost of materials and inflation,” he said. The firm engages in funding developments and Rendall said managing the related costs was at the forefront of its investors’ minds.

“We are investing institutional and retail money. In either case, our approach is to have as much certainty as we can. Clearly certainty has a cost. But that’s embedded in our investment process to have a clear line of sight.”

When asked the difference in underwriting costs between today and six months ago, Rendall said: “It is difficult to generalise because each deal is different. But we’ve been talking about cost escalation going above 10 percent per annum.”

Approximately 90 percent of La Française Real Estate Managers’ assets are in France, with the remaining 10 percent elsewhere in Europe, and that offers a protection when it comes to fixing costs, Rendall said. “In the French market you have the VEFA (Vente en l’état futur d’achèvement) structure which is a forward-purchase structure enabling you to buy a new development at a fixed price. The risk on the cost side stays with the developer. Almost all developments we buy are through that type of structure.”

But he says even if managers can benefit from structures like this, much of today’s development risk resides with the covenant backing any contractual arrangements made with suppliers. “The certainty is only as good as covenant backing it,” Rendall said. “In this environment there is a risk of some developers not being there in the end.”

La Française Real Estate Managers manages most of its assets via open-end funds and separate account vehicles and mainly for a mix of both retail and institutional investors. Last month, the firm signed a €300 million mandate with Danish pension fund PFA for the acquisition and management of senior housing and private rented sector assets across Europe, with a particular focus on France and Belgium. About €200 million is expected to be invested in the former and €100 million in the latter segment. The manager already manages almost €3 billion of assets in these sectors currently.

Rendall is not alone among senior private real estate executives to warn of the need to hike capital expenditure underwriting in response to the current financial environment. At the MIPIM conference in Cannes last month, Cristina Garcia-Peri, head of strategy and corporate development at Madrid-based manager Azora, said her firm has increased general underwriting for capital expenditure by 20 percent “to be as conservative as possible.”