AXA Real Estate goes global

As the largest real estate investment manager in Europe, AXA Real Estate is now taking steps to grow a global platform.

AXA Real Estate is taking steps to expand its platform outside Europe, particularly in North America and Asia, CEO Pierre Vaquier told PropertyEU. ‘Our asset basis has a strong focus on Europe. That is our strength and we also serve a lot of European clients. At the same time, we believe we have to become more global. Not necessarily because our investors want a global fund, in fact most want to invest in regional funds. A key driver for becoming more global is that capital sources outside Europe are substantial.’

Over the next five years, Vaquier is targeting a portfolio of some €10 bn outside Europe. While a number of big North American investment managers have recently formed alliances with European partners in a bid to gain a stronger foothold in the European market, Vaquier said he was planning to realise expansion outside Europe via organic growth and through partnerships with local players. ‘One thing we are not considering is a large acquisition. For us, an integrated platform is essential. Some players have been successful through big acquisitions but we believe it would be very difficult to integrate an independent business in the US. We plan to do things step by step. We want to be sure about the quality of the services we provide and believe that a fully integrated approach is easier to realise when you start from scratch. We prefer to build our own platforms. ’

At the same time, Vaquier is keen to join forces with local partners and aims to develop investment teams in Japan and Australia. A single platform serving the entire Asia-Pacific region is not on the cards either, he said. ‘Asia is very complex. If you want to create an investment platform in China or India, you really need to create local teams.’

First stop New York
The investment manager already has a sales team on the ground in the US where it recently hired Steve McCarthy as US head of asset management and transactions. McCarthy will be responsible for sourcing and executing acquisitions and disposals on behalf of AXA Real Estate’s clients, in addition to presenting club and other transaction-based deals to institutional investors in accordance with their specific investment requirements. In the US, AXA Real Estate has already raised around $100 mln for its strategy of investing in triple net retail leases and is now seeking to raise another $350 mln, Vaquier noted.

Aside from New York, AXA Real Estate also has offices in Tokyo and Singapore, but, with the exception of Japan, the focus of these operations is primarily on sourcing capital for European investments and platforms, Vaquier said. The next step is to create local teams and gain recognition as a dealmaker in the local market as well, he added. ‘That is where you can obtain significant successes.’

In Japan, AXA Real Estate is now taking steps to deepen its presence and is starting to raise funds for the second tranche of a debt fund. In the first year the fund already raised $250 mln, Vaquier noted. The Paris-based investment manager is also active in Australia: in early September it acquired an office building in Sydney from the Australian Postal Corporation in a 15-year sale-and-leaseback on behalf of a Singaporean client. The deal was closed via AXA Real Estate’s Australian partner, Eureka Funds Management, which is focused on the alternative investment sector in Australia.

Vaquier acknowledged that Eureka Funds Management is a model for the type of partner he has in mind: ‘Eureka is a strong firm with local expertise.’ The deal is an important step in AXA Real Estate’s goal to develop a global real estate investment management platform, he added. ‘While we are already active in the Asia-Pacific region through our investments in Japan, the move into Australia is significant as it provides us with exposure to a new territory and allows our clients to benefit from our global investment and asset management expertise.’

China is also on AXA Real Estate’s radar, Vaquier said. The company has just spent three years developing a strategy for investments in the residential market in mid-tier cities. ‘We have spent a lot of time in China but you need to get the market timing right to deploy capital. There’s huge demand for residential in China but we want to be sure of our exit possibilities.’

With the wave of Chinese capital gaining momentum in Europe, Vaquier conceded that this was a key target in terms of sourcing new clients. ‘But you need to access it and deliver on what you promise. China is a major focus, but you need to be flexible and interact where the opportunities are,’ he said, pointing to Canada, the US, Korea and Japan. ‘We haven’t done that much yet in Japan, but things are changing. You need to have an open approach and you need to build a relationship.’

Infrastructure drive
AXA Real Estate’s appetite to expand beyond Europe is being fuelled by its ambitions to broaden its client base to include non-AXA insurers and pension schemes. Another key driver is that investors in North America and Asia currently account for about 70% of total capital being allocated to real estate worldwide. While AXA group clients have traditionally formed the base of its real estate business, third party clients already account for roughly half of assets under management. Vaquier sees that figure growing further in the coming years as the real estate investment manager continues to develop new and refine existing strategies. A case in point is its infrastructure investments which are currently open only to AXA group clients. AXA Real Estate has a substantial third-party manager ambition in this area, Vaquier said: ‘The market is very large and the opportunities are significant.’

The expansion plans follow an announcement earlier this year by parent company AXA group that it is spearheading a major drive in the infrastructure debt market and has appointed AXA Real Estate to source and manage the investments. In total, the group has committed to invest €10 bn in infrastructure debt over the next five years. The new segment marks a logical add-on to its commercial real estate debt platform where AXA Real Estate is a leader in Europe with a portfolio of some €7 bn. Negotiations are well advanced for further commitments which could increase this figure to over €10 bn. In the infrastructure segment, AXA Real Estate aims to underwrite loans of up to €500 mln backed by assets located in established global economies, with a primary focus on core European economies. Infrastructure is a label for a very large sector, Vaquier said. ‘It’s not just one sector and we plan to do this step by step. We want to have a good understanding of the underlying risk and where the risks are. But there is appetite for this sector. There’s a mismatch between borrowers and lenders at the moment.’

What the sector needs are investors capable of taking on long-term balance sheet liabilities for a period of five to seven years or more with a vision about this new and developing field, he added. ‘Private equity investors normally have a short-term horizon and banks are constrained in extending loans with maturities beyond four to five years because of Basel III.’ Vaquier said he expected a spread of 230-300 basis points on loans. ‘It depends on the level of risk and whether you get involved in developments in new territory. We will be targeting the safer part of the market and mainly loans.’

More exposure to corporate bonds
AXA Real Estate was also one of the first movers in the real estate debt space, venturing into the sector as early as 2006, well before the outbreak of the financial crisis and the retreat of traditional lenders such as banks. The European real estate debt market is still in its infancy compared to the US where insurers have been active in this field for several decades, but the potential is significant, Vaquier said. ‘It’s not unreasonable to think that insurers will account for 20-40% of the real estate lending market in Europe over time. Our platform has already reached a significant scale. We are a very serious player in Europe.’

While new lenders are entering the market, margins for senior loans are still very interesting, Vaquier said. ‘It’s like any market. New lenders might increase and margins might fall. You have to be disciplined and slow down the investment pace and adapt the strategy to the circumstances. As the market becomes more competitive, we will see different types of loans and also more lending outside of Europe.’

Vaquier also sees AXA Real Estate expanding its exposure to corporate real estate bonds in Japan and other parts of Asia, particularly in the mid-cap segment. Corporate bond issuance has grown in Europe over the past few years as real estate companies turn to alternative sources of financing and Vaquier sees a pattern in Asia. ‘We aim to create a global platform of direct loans and bonds. We understand the underlying risk and that is how we can bring value to our clients.’ At the same time, active management remains a key pillar of AXA Real Estate’s strategy, he added. Products like ETFs (exchange-traded funds) where one investment manager can be substituted for another and margins are very thin, are not on the cards, he said. ‘We want to invest in strong platforms where we can add value. Active management is in our DNA.’

More room in the stable
Like many of its larger peers which offer pooled fund vehicles, AXA Real Estate has seen more appetite since the outbreak of the global financial crisis for separate accounts, club deals and joint ventures. In 2011, AXA Real Estate announced it had formed a joint venture with Norges Bank, the investment arm of the Norwegian oil giant. The partners have already collaborated on office portfolio deals in France and Germany and Vaquier said more transactions were in the pipeline. ‘We will continue this relationship. We both have a very similar strategy and are long-term investors.’

While the deals with Norges have been sizeable, Vaquier said there was still plenty of room in the AXA Real Estate stable for separate mandates that fit the specific needs of other partners. ‘Norges focuses primarily on core or core+ investments. It doesn’t do development. And we are one of the few (investment managers) launching new projects,’ he said, pointing to an 86,000 m2 office development that AXA Real Estate is building in Paris next to the French Ministry of Defence. ‘Korean investors also mainly like core assets, but Chinese sovereign wealth funds tend to look more opportunistically or at added value investments to generate returns. They even like senior housing.’

Aside from hospitality, AXA Real Estate is also stepping up its presence in other alternative segments such as healthcare, student accommodation and senior housing. Indeed, the investment manager is raising the bar in terms of its ambitions after launching the strategy in October 2012. At the time, it said it aimed to double the size of the alternative real estate assets it manages to over €1.5 bn over the next three years, but Vaquier is now stepping up the pace. ‘We now have €2 bn of assets under management in alternatives, but we want to grow this to about €3 bn.’ The Paris-based investment manager already has an alternative fund, but is seeking to develop this further and strengthen the teams, Vaquier added. ‘You need active asset management and expertise in house and the right people to underwrite risks. A big advantage is that the alternatives segment is less crowded.’

Judi Seebus
Editor in chief PropertyEU