The global head of AXA IM Alts has drawn parallels between the current market and the 2008 global financial crisis (GFC), while emphasising key differences, particularly in office sector dynamics and portfolio diversification.
Isabelle Scemama told delegates at this year’s INREV Annual Conference 2024 in Berlin that, while deal volumes and capital value changes mirrored trends seen during the GFC, there were positive signs – notably, stabilising yields, high-net-worth investors returning to the market and cross-border transaction volumes are recovering.
She said the big question was whether offices were becoming “the new retail”. While there have been similarities between the recent decline in office values and the fall in retail property values in previous years, Scemama pointed to significant differences.
The office sector is supported by a wider range of industries compared to retail’s concentrated struggles, Scemama said. Additionally, grade-A office space with strong environmental, social, and governance (ESG) credentials is performing significantly better than lower-quality assets.
“Yes, history repeats itself, and there is some similarity between what happened during the GFC and what’s happening now,” she said. “Probably we have learnt from the past.”
Scemama said the GFC had a similar effect on transaction volumes as seen today. “If we look at changing capital values, we have almost the same thing for the GFC,” she added. “The big question is do we have more to come?”
Scemama believes yields have been stabilising since the beginning of 2024. “Yields across all asset classes are stabilising between let’s say 4% for multifamily and a little bit more than 5% for hotels,” she said in her presentation.
Scemama said market signals suggested a potential increase in values, possibly driven by stabilising interest rates and a “correction” in cross-border transaction volumes. Volumes were stabilising in major cities like London and Paris.
Another signal was activity among high-net-worth individuals and the family offices, a group Scemama said “represent more than 20% of the transaction volume compared to something like below 15% before 2022”. She said: “That’s exactly what we’ve seen at the end of the GFC cycles.”
Scemama said cross-border volume with the help of private capital is starting to be active in the market, signalling “the fact that we are probably at the end of this cycle”.
While most sectors appeared to be stabilising, the question remained whether this would also apply to office and retail, she said. “We have seen the market being driven by some asset classes, but what about offices?”
Broad industry base props up offices amidst retail woes
While there are similarities between the declines in retail and offices, she said, there are important differences – most importantly that offices are underpinned by a broader base of industries, including financial services, technology and manufacturing, while in retail it is more concentrated, with numerous bankruptcies.
Scemama highlighted that this diversification within the office sector also translated to internal variations, with a stark difference between high-quality grade-A assets and lower-quality properties.
Grade-A office space is outperforming the market, Scemama said. This trend extends to new leases, where demand is concentrated on the best assets. Compared to 2015, today’s tenants prioritise either buildings under construction with strong ESG certification or existing properties with A, B, or C energy performace certificate (EPC) ratings, said.
The existing supply does not meet this demand, with only 30% of existing office space qualifying and the majority falling below the desired EPC standards. This necessitates significant capital expenditure for upgrades, Scemama said.
While remote working undeniably affects the office sector, it is important to remember that a diverse range of industries across the entire economy still rely on office space, she said. Addressing ESG concerns, however, remains crucial for the sector’s long-term health.
To illustrate the contrast in portfolio composition, Scemama shared an anecdote. While discussing diversification with a fixed income colleague, she learnt their portfolio typically holds around 250 issuers. In comparison, a core commercial real estate portfolio is backed by leases often exceeding 8,000 names.
This shows the diversification advantage of real estate, particularly within the office sector, Scemama said. And today’s real estate portfolios are far less reliant on offices.
The INREV OECD index, spanning a period from 1998, revealed a significant shift, Scemama highlighted in the presentation. Whereas offices once dominated, accounting for over 50% of the portfolio, their current share has dropped to 30%.
This decline has been accompanied by a rise in alternative asset classes like residential, logistics and data centres and life science and until recently cinema studios, each capitalising on specific megatrends and this diversification is a key differentiator from the GFC, Scemama said.
According to Scemama, today’s broader portfolio composition allows investors to capture growth across various sectors, reducing reliance on a single asset class.
This strategic shift is reflected in rental growth, she said, adding that last year AXA IM Alts’s “rental growth from this portfolio was 10%”, so it is “a portfolio capable of really overperforming despite what is happening on interest rates”.
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