Pierre Vaquier took over as CEO of AXA Real Estate Investment Managers (AXA REIM) last April, having previously been deputy managing director of the company and CEO of AXA REIM France. His favoured strategies for today's market environment include favouring ‘core assets in key markets' and maintaining a presence in the opportunistic space. He spoke to Richard Lowe
At the end of Pierre Vaquier's first year at the helm of AXA REIM, the company announced that €5.7bn of direct property acquisitions had been completed, a 54% rise on 2006. Significantly, approximately half of all purchases were made in the second half of 2007, despite the onset of the global credit crunch during that period. While this is a reassuring finding, Vaquier is very conscious of potential far-reaching ramifications that have yet to be felt.
"No asset class can say they are immune to the situation," he says soberly.
Investors certainly are operating in uncertain times. The sub-prime debacle and global liquidity crunch have been followed by a drying up of transaction volumes, continued volatility in listed markets and a dramatic repricing in the UK. Then, of course, there are the macroeconomic worries surrounding a potential US recession. In short, how can investors make sense of the current situation?
"The first consequence is that the source of capital is more expensive," Vaquier begins. "In the first instance, the cost of capital is more expensive on the leverage side with an impact that is quite substantial. This is slightly offset by the decrease of the base rate, but still the margins of the bank and the loan-to-value constraints have been modified, which makes gearing more expensive.
"The second item is on the capital of the equity pricing. Currently, everybody is reviewing its model, and you had clearly in most markets a strong yield convergence. This yield convergence is being questioned by people reassessing the risk premium. They are looking for the assets depending on their quality and their capability to sustain a more difficult economic environment."
It is well known that effectively real estate assets across the board have benefited from blanket capital appreciation in recent years. This is due mainly to very positive rental outlooks, but more importantly, as Vaquier suggests, because of the "decrease of capitalisation rates by investors, whatever categories assets were in and whatever the risks were."
He adds: "People are currently readjusting the capitalisation rates and are, in my opinion, either looking for core properties which have a lot of stability in the long term or for opportunistic situations. People are getting more cautious on the intermediary categories, which are core-plus or value-added. Clearly, this is where the substantial capital reassessment situation exists."
There is comfort to be had amid the disconcerting clamour to reassess risk. "At the same time, the fundamentals of real estate, in terms of occupancy and demand, are remaining pretty satisfactory," he says. "We are not in the situation like the one we saw in previous cycles, such as, for example, the big cycle of the late 1980s and early 1990s, when there was massive oversupply. We are not in that situation."
Vaquier admits that "pockets" of oversupply do exist, such as in the Spanish residential market, but the point is there isn't an overhang across the majority of established property markets.
But while investors can take a sense of optimism from the notion that fundamentals are somewhat sounder than they were during the last downturn, there is still much uncertainty when it comes to attempting to arrive at an outlook for the global real estate market in the short or medium-term.
"It is very difficult to have a black or white situation," Vaquier admits. "It is going to be a market environment where players will have to be very selective in the transactions they do, but at the same time it is a situation that can create opportunities.
"It is too early to say the situation is over, but at the same time the market in some areas might start to be attractive, at least to consider due to the fact that the fundamentals are still attractive in the medium-term."
One thing Vaquier does not expect is a market freeze in terms of volume transactions, as was very much the case in the early 1990s. "For 18 months to three years you had almost no transactions at all. This time, we expect an active market, so we don't see that type of situation," he says.
"But at the same time it is going to be a market that is going to be more difficult to read, because a lot of transactions will happen off-market and they will not be as optimal financially as they were up to 2007."
Then there is the big question that all European investors want answered: is the current situation just a short-term blip or the start of something deeper and more prolonged? This conundrum is, of course, related to the likelihood of a US recession and whether the rest of the world's economies have developed in such a way as to stave off a serious global contagion.
AXA REIM's house view is that a US recession will affect European economies, but will not cause them to fall into a recession as well. If Europe was to enter into a recession, Vaquier admits: "The cycle would be longer and the situation for the next two years could be more difficult."
"But as a house we believe in the first scenario," he says, albeit with an important caveat. "It is something that needs to be watched carefully."
Asia and the emerging markets are also in a good position to weather the storm, it seems, despite being "partially an export industry". He says: "We think they have the wealth and the dynamism to carry that period and those markets should continue to perform."
On the subject of Asia it is worthwhile considering the way in which European institutional investors have been increasingly focusing on the region over recent years and months. For pension funds, exposure to Asian markets is the natural step in the move to global diversification. But surely the high returns seen in the region must have played some part in spurring what seemed at times like a clamour on the part of European institutions to secure their place in the Asian success story?
For Vaquier the timing of pension funds' recent diversification into Asia is not so much a case of chasing high returns as a recognition of the strength and dynamism of the local economies.
"If you look at investors in Europe, currently all of them are considering Asia as the first priority after Europe, for the very simple reason that they know real estate is correlated to the economy and they believe very strongly in the strength of the Asian economies. The underlying dynamism of the economies - that is what makes investors very positive." But how sustainable are these high levels of returns? Is there a danger that investors could be burnt by striving to capture the sort of outperfomance seen recently?
Vaquier believes that the answer to this question rests with what he has already mentioned about reassessing risk. If there is a danger in gaining exposure to Asia, it is that investors "ask for the same risk premium as they would in other territories that are more stable," he says. "It is a question that needs to be looked at carefully."
Emerging from a prolonged era of market stability marked by consistent capital growth into an unspecified period of uncertainty and disruption calls for a change of tack for global real estate investors - and, for a business like AXA REIM, the necessity to retain a competitive edge.
Vaquier sees a number of strategies that investors can adopt with which to cope - and perhaps even thrive - in today's market environment. One is to favour "core assets in key markets" and another is to maintain a presence in the opportunistic space.
As Vaquier reveals, AXA REIM is today much more interested in core assets than it was 18 months ago, but this comes with an important proviso: such assets have to be purchased "at the right price".
"We considered the pricing of those core assets as too expensive then," Vaquier says. Today, on the other hand, it is possible to find core assets at attractive prices, he suggests, given their value over the long term and - importantly - the absence of a significant supply overhang.
Another strategy is more concerned with assets at the opportunistic end of the investment spectrum. Savvy investors know that whenever uncertainty and turmoil asserts itself, opportunity often follows. And in today's market, investors who have been through downturns in the past will have recognised that the dramatic repricing in the UK, for example, combined with an absence of leveraged players - thanks to the credit crunch - is likely to create opportunities for equity-rich investors such as pension funds.
"We might see the aggressive players, who have been using leverage, not so active due to the market conditions around gearing," Vaquier says. "This might create an opportunity for investors to be very active in that segment."
There is, however, the question of timing regarding markets like the UK. "People are currently a little bit on the sidelines," he says. "Investors want to be sure they have revisited their risk premiums at an adequate level before they make any decisions, which might create in the market a kind of wait-and-see situation."
Indeed, investors may be wielding their right to hold fire on investment activity until a clearer picture emerges, or they feel the time is right to commit capital, but at least they are looking to capitalise on troubled markets rather than moving out of the asset class altogether, as was often the case in the early 1990s.
In terms of AXA REIM's pension fund clients, Vaquier is pleased to announce there has been little in the way of panic over recent market developments. "There is a lot of professionalism and people see the current environment as an opportunity," he says.
Admittedly, an important factor in this behaviour is the fact that many European pension funds are below their target asset allocations in terms of committing to real estate.
"It is positive for them to gain on the allocation. At the same time they know that the environment coming is one of uncertainty.
"A lot of them are currently reviewing their exposure to be sure they have no major risk, so they are reassessing their holdings, but we have not seen at this stage clients who are retrenching or considering reducing their exposure. This is clearly in contrast to the early 1990s."
However, looking at the big picture, Vaquier sees that a lot has changed in the global real estate industry over the last 10-20 years. "If you compare today with the 1990s, we are in a sector that generally has gained a lot in professionalism and transparency.
"In terms of transparency, the situation is not perfect everywhere - there are still some countries where, for example, things like indices are not at the right level - but it is a sector, clearly, which has gained a lot of sophistication and which has learnt to avoid some big mistakes."
And Vaquier returns to the issue of oversupply, a factor that led to the enormity of the late-1980s/early-1990s downturn. The dangerous over-enthusiasm for speculative developments that is associated with the period is something that Vaquier believes "has been corrected partially by the professionalism of the sector".
An equally important change for Vaquier is the globalisation of the real estate market. "Almost all the markets are international, which means that for which ever reason one source of capital might disappear or become ineffective it is replaced by others."