Europe lags in AXA IM’s new global product

US equities and corporate bonds account for the biggest share of a new global real estate product that AXA Investment Managers (IM) is developing which combines exposure to listed real estate stocks and debt.

‘The US is the most liquid and diversified market in the world,' explained Frédéric Tempel, head of listed real estate at AXA IM. But the strategy monitors leading property companies in all major real estate markets and sectors, he added.

Earlier this week, it emerged that AXA IM is tapping into the growing appetite for global property stocks with a new hybrid product that combines exposure to listed equities and corporate bonds. By allocating a relatively large portion (40%) to bonds, the volatility of the product is significantly reduced, Tempel claims. Structured as a Luxembourg-based SICAV, WF Global Flexible Property was launched at end-2014, has a six-year term and target returns of between 6%-8% with a 60% allocation to equities, he added.

The targeted returns are a blend of those expected from the two sides of the mix. Equities historically provide a stronger return than bonds but are more risky. With a 60% share of the total, the expected return is put at 8-10%. By contrast, bonds generally yield a lower return but are also less volatile than equities. With a 40% share of the total allocation, expected returns for this portion are put at 3-5%.

While the European market for public real estate debt instruments has evolved rapidly since the outbreak of the financial crisis, the equities market as a whole still lags behind the development of the listed sectors in Asia and the US, Tempel said. ‘In relative terms Europe is looking good, but in absolute terms it is not. We’re in the midst of a process of natural evolution, with some markets developing and others contracting. The Netherlands is at the beginning of a cycle in the residential market and I expect we will see several IPOs there in the coming years. Germany on the other hand is undergoing a market consolidation.’

AXA’s new strategy offers coverage to public property companies beyond Europe, to the Americas and Asia Pacific. ‘In the past, there was a bias to domestic property shares, but the market is evolving a lot,’ Tempel said. ‘In a global context, the European real estate market is relatively small. But our product allows investors to diversify their portfolio in terms of geography and sectors. Going forward, more allocations will be global,’ he predicted.

The US accounts for the biggest share of the new global strategy that AXA IM is now marketing, followed by Japan and France. Of the other European countries, only the UK, Germany and Italy are included. The share of retail and office is fairly equal at 28% and 27% respectively, followed by residential with 13% and industrial (9%). Storage, leisure and healthcare also feature in the mix.

Meanwhile Europe's public real estate debt market is evolving in leaps and bounds. Over the past seven years, listed real estate companies in particular have boosted their share of the corporate bond market in Europe. In 2008, listed real estate companies had €60 bn tied up in corporate bonds; by 2014 that figure had more than trebled to €200 bn.

While Tempel and his team are offering the new global strategy to third parties, in particular dedicated life insurers, parent company AXA is already a client and is providing seed capital, he said. Indeed, the Paris-based insurer has already trialled the strategy with a Europe-focussed fund that was launched in 2013. In its first year, the fund generated a return of 15%, Tempel said, but added: ‘The economic conditions were very supportive last year.’

The real estate sector currently finds itself in the ‘sweet spot’ of the cycle, Tempel noted. ‘Real estate prices have plummeted since the outbreak of the crisis and interest rates are historically low and are set to remain low. Most real estate companies have restructured their operations in the wake of the financial crisis and are currently able to obtain cheap financing thanks to the low interest rates.’

Active management is one of the key benefits over an ETF (exchange-traded fund), Tempel said. ‘We tested this strategy in the US market and proved with our blind model that we could cut out a significant amount of equity risk and still outperform.’