AXA sees 'attractive' premium in lending market

The real estate lending market currently offers an 'attractive' premium for European insurers, Isabelle Scemama, head of commercial real estate finance at AXA Real Estate, said during a presentation at the annual IPD conference in Frankfurt last week.

'The premium is clearly there today,' she said, pointing to an additional return of between 150 to 200 bps on real estate loans compared to similar risks on the bond market. 'The UK market is the most attractive, and Germany the least due to the strong competition of banks there.'

Under Solvency II, insurers face two options for optimising their portfolios, by increasing the level of return or reducing the required capital charge, Scemama said. Real estate loans allow insurers to diversify their credit allocation within the fixed income segment and optimise their solvency ratios, she added.

‘There are problems with real estate,' she conceded, 'it is an illiquid asset, it’s more complex than a bond and requires day-to-day management. You have to find a premium, but it is clearly there now.’

Scemama claims long-term real estate loans have a limited default risk, generate high and stable returns and a better performance overall relative to bonds. AXA’s experience in terms of the level of recovery has also been good, she said, adding that overall losses had been confined to below 10 bps. ‘Commercial real estate loans are not liquid, but insurers will be ready to abandon this demand if they can find a premium and they meet other expectations,’ she predicted.

AXA Real Estate is a pioneer in the European property lending arena, having ventured into the sector as early as 2005. The company started off 'very prudently and very slowly', Scemama said, but now has lending capacity of some EUR 5 bn.

More recently, other European insurers have also stepped into the market including Allianz, Metlife, Legal and General and Prudential. Nevertheless, Europe still has a long way to go to catch up with the US where disintermediation has for years been a trend and where real estate lending accounts for a major portion of the total fixed income market.