EUROPE - Axa REIM, the real estate arm of Axa Investment Managers Group, is holding back from investing in European markets because it predicts property prices will drop even further and will concentrate on buying distressed debt.
The financial crisis has prompted Axa REIM, like many other real estate investment managers, to make a tactical and strategic decision to refrain from investing in falling markets because it believes property prices have not yet reached their lowest point and are unlikely to do so until 2009, according to Alan Patterson, head of research and strategy for Europe at Axa REIM.
"We are seeing a falling market and, with some exceptions, we are holding back on purchases," said Patterson.
"We don't think prices have reached their bottom yet. Allied to that we have been selling more properties than we would otherwise sell into the market, because you might as well sell out before it gets worse."
Axa REIM, which has over €43bn assets under management, is building its forecasting models by analysing and identifying supply and demand, in the hope it can spot the right time to re-enter the market and buy distressed debt at a discount.
"There are distressed sellers out there, and there are banks who want to offload property because they need the cash. What we are doing now and what we will be doing in 2009 is putting together opportunistic funds and these will be taking advantage of those market weaknesses," said Patterson.
Axa REIM, which offers pan-European, country-specific and asset-specific funds to investors, has already started buying distressed debt in the form of loans which it believes are not expected to default.
"We're going to buy fairly secure debt at a discount because the market just needs the cash. We'll hold that, with good running yields on debt because we'll be buying at a discount and we will then look for a re-rating of that debt in due course when the economy and the market improves," said Patterson.
The firm plans to invest in a second, riskier category of distressed debt from 2009 and buy loans from organisations which are expected to default, and can therefore be purchased at a cheaper price.
Commenting on potential investment opportunities in Europe's falling markets, Patterson said: "At the moment, there are almost no core investment opportunities across Europe anywhere. There are increasingly opportunistic investments where you have to be willing to take on board the risk."
He notes the current financial crisis means pension funds are rethinking their real estate investment strategies and waiting until the pricing is right.
"Pension funds are fairly conservative animals. They are not in the business of taking big risks. They want to be confident that they are going in at the right time," said Patterson.
The UK market, which was one of the first to see its property values drop because of its liquidity and transparency, will be one of the first European real estate markets that Axa REIM will consider re-entering in 2009.
"We are looking at the UK as being an area where, even for core investors, at an early stage we will go back into. We will be putting our clients back into the UK at an earlier stage than we would be, say, in other European countries," said Patterson.
Asia, meanwhile, still offers high potential for real estate investors: he suggests.
"Asia contains a lot of emerging markets. They've been showing tremendous economic growth. Coupled with the economic growth is the need for modern, better property and that is the opportunity," said Patterson.
AXA REIM recently expanded its presence in Asia by opening offices in Japan and Singapore.