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Carbon footprint

PGGM’s latest real estate investment program sets 2030 zero carbon target

PGGM Private Real Estate, an investment division of the second largest Dutch pension fund service provider, has established a joint venture with Redevco, one of Europe’s leading retail real estate investment managers.

The EUR550 million Urban Retail Ventures will invest in the most desirable and favourable shopping and leisure complexes in Europe, using a research-driven methodology to select those cities that are thriving as quality retail locations.

“Our PGGM private real estate fund investment strategy has EUR11.5 billion in AUM, which we invest globally and we continue to expand that portfolio,” says Mathieu Elshout, Senior Director Private Real Estate, PGGM. “We were looking to add a retail investment but recognised that retail faces competition from e-commerce and that parts of the retail sector may struggle (going forward). However, we are of the opinion that there are opportunities for taking a targeted approach to retail and that is what we are doing in this joint venture with Redevco.”

The Urban Retail Ventures strategy works by applying Redevco’s proprietary ‘City Attractiveness’ research model. In short, this is based on the conviction that tomorrow’s most successful retail destinations will be those best able to cater for a growing desire among consumers to enjoy a full day’s shopping; one that also includes a well-curated mix of food and beverage and leisure options. It seeks to leverage the specialist retail market expertise of Redevco’s investment teams across Europe with the investment prowess of the PGGM Private Real Estate team.

As Elshout explains: “We are targeting a list of cities based on their city attractiveness model which we would expect to provide outperformance in the next few years when it comes to retail. We will seek out assets that will allow us to manage the whole environment. 

“Redevco is a highly skilled investment management company. They’ve been around a long time and know the ins and outs of retail and have repositioned their portfolio over time to reflect the changes in retail. 

“We add our knowledge of existing partnerships. We look for strategic partners all over the world who have boots on the ground, local offices, and the skills to implement the strategy. We feel we are like-minded organisations when it comes to sustainability so it made sense to go into partnership.”

The joint venture has been seeded with the acquisition of Promenade Sainte-Catherine, a large-scale urban scheme in the centre of Bordeaux.

In total, Redevco’s City Attractiveness model ranks 825 European cities across 25 countries using a series of soft factors that go someway towards creating a buzz, or social vibe that attracts both tourists and local populations. 

Elshout says the PGGM and Redevco joint venture underlines its belief in top retail destinations, offering the right mix of functions and outperforming over the long term. “As a long-term investor we believe in this research driven approach,” he says.

Not that Urban Joint Ventures will be scanning all 825 cities. Rather, it will be more tightly defined with the strategy limiting its scope to some 60-plus European cities. Depending on what assets come to market or Redevco is able to source off-market, “it could be that for the current capital we’ve committed to the strategy we end up with five assets in five different cities,” states Elshout.

The usual suspects, such as Paris and London, are on the list. That being said, the investment teams are all too aware of the fact that not all cities are in the same stage of the real estate cycle. 

Real estate markets have a distinct, wave pattern momentum that go through different cycles over time. For early cycle cities like Munich, Stockholm and Paris, yields have stabilized for example, while cities like Luxembourg are later in the cycle and are still experiencing yield compression at the same time as rising rents.

“Opportunities may come up in cities we feel are overvalued, if we feel for the longer term this is the right asset to acquire. On the other hand, cities that are undervalued and better positioned in the real estate cycle might also provide excellent opportunities as well. 

“Either way, we take a very disciplined approach and constantly review the list of 60-plus cities,” says Elshout. All of the cities in the list offer a great combination of history and other factors that attract people. 

Take the seed investment in Bordeaux: this is a thriving city that already attracts a lot of tourists and is well connected to Paris with the TGV. It has many ‘soft’ factors that work to its advantage.

“The asset - Promenade Sainte-Catherine – is situated right in the historic heart of the city, which is a UNESCO heritage site. It offers more than just retail – it offers food and beverage and leisure facilities for people to enjoy a longer day out. That’s the new trend in retail: you have to be offering more than just a shopping experience,” remarks Elshout.

By combining big data factors and in-depth local knowledge, says Andrew Vaughan, Redevco’s CEO, “we can pinpoint those city and micro-locations that can produce a ‘halo effect’ allowing premium operators in these sectors to maintain their edge over mid-market competitors, making these destinations the most likely winners in the current retail landscape, which is both innovating and being disrupted at an astonishing speed.”

Importantly, Elshout confirms that the aim is to make the Urban Retail Ventures portfolio completely carbon neutral by 2030, which will include the emissions of all retail tenants. 

It is a groundbreaking ambition in the private real estate space, but one which, “as a responsible investor we feel is the way forward,” says Elshout. 

He further elaborates: “It is a recognition that we feel there should be an urge across the industry to look for a reduction in carbon dioxide. We are committed to reducing risk in our portfolios and supervisory bodies are looking more closely at carbon emissions. They recognise there is this risk coming from energy use. 

“For us it is a clear ambition. We have found that without such ambitions, you are not as likely to reduce emissions as much as you could. We will try to identify all possibilities to meet this target by 2030 with each and every asset we acquire. The bottom line is making returns. Therefore, we will have to find a way to pick the right assets that meet this zero carbon target as well as make the required returns on these investments.”

Redevco will be responsible for the asset management of Urban Retail Ventures.

The investment period will be over the next two years. Once completed, the assets will then likely be held for five to seven years, with the optionality towards the end to hold individual assets for longer if there is further upside potential to be gleaned.

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