INTERVIEW: AXA IM taps into demand for property with new hybrid product

AXA Investment Managers (IM) is tapping into the growing appetite for global property stocks with a new global 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, according to Frédéric Tempel, head of listed real estate at AXA IM. ‘The mix is also roughly in line with the balance sheet of a listed real estate company which often has a debt/equity ratio of 40:60,’ he noted. ‘The strategy reflects the investment profile of a normal real estate operator but is more liquid.’

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, Tempel said.

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%.

When financial markets are more volatile, the bond share of the mix will be increased somewhat, Tempel said. ‘The bonds and equities share are communicating vessels. It’s all the same product but the allocation to each asset class will depend on investment conditions. That is the beauty of this strategy, you can hedge both and you can move the needle in terms of returns by 1-2% with both bond and stock picking. Altogether that can add up to a high single-digit return.’

AXA IM’s hybrid fund product is a cousin of the balanced funds that were introduced about 10 years ago to offer investors the benefits of equities and bonds in a single vehicle. While still a novelty in the property industry, Tempel is optimistic that the fund product will appeal to a growing base of real estate investors. ‘There is definitely demand for real estate linked products combining income and daily liquidity. The outlook for property in general is very positive and the appetite for income-generating products is huge. The appetite is there and will grow.’

Tempel expects to garner interest for the product from investors in Asia, the Americas and Europe. ‘The Netherlands but also the Nordics have very sophisticated investors. Historically, there is appetite for equities among Dutch institutional investors.’ While Europe is highest on the list, North America is also a target, Tempel said. ‘We have good access to the Canadian pension fund community.’

Track record
A potential deterrent for insurers to invest in real estate equities rather than direct property is the fact that capital requirements under Solvency II are higher for equities than for direct real estate. ‘But,’ Tempel pointed out, ‘capital requirements for bonds are significantly lower. We are investigating whether it is possible to reduce the level of capital requirements for a mix of equities and bonds to the same level as for direct real estate.’

In the coming 12 months, Tempel aims to raise a few hundred million euros for the strategy but claims that ultimately it could represent a ‘multi-billion-euro pool’ in allocations. ‘The market likes to see a three-year track record first and it takes time to explain a new approach, but so far the feedback has been very positive. Ultimately I think we will see more products. We’re seeing some of our competitors going in the same direction and that will help us as it will familiarise our potential clients with the product.’

The strategy is managed by a specialist team of 11 real estate equites and debt analysts which monitor the balance sheets and cashflows of selected companies and compare their relative valuations against their peers.

At present, the team is based in Paris and London but Tempel aims to expand it to Asia and the US in due course. ‘We add value by offering active strategic allocation management in terms of the equity/debt allocation as well as selective company investments based on the expected value creation and real estate fundamentals.’

Property is not like broader stocks in the market, he added. ‘It requires a deeper understanding of finance and equities. Our team analyses the factors that bring movement and where we are in the capital cycle depends on investor appetite in the investment class as well as the debt cycle. Beyond the income story, it’s important to keep an eye on where we stand in the lending cycle. We monitor how disciplined lenders are as they go up the risk curve and move the cursor in a pro-active manner.’

This is not the first time AXA Real Estate is breaking new ground. Well before the financial crisis broke, the Paris-based company was setting up a platform to enter real estate lending and got off to a flying start as the market opened up for alternative lenders. Tempel: ‘We are lucky to have coverage of all the leading asset classes in house. What we are doing now is bringing them more closely together to build a platform based on the submarkets of the property markets.’

Judi Seebus
Editor in chief