? AXA IM Real Assets is focusing on manage-to-core strategies, as core assets are too expensive.
? Investments in real estate development will become increasingly important as demand in European markets increases.
? The U.K. and London will recover from Brexit, which is creating attractive investment opportunities as listed companies struggle.
Laurent Lavergne, head of separate accounts, AXA Investment Managers - Real Assets
Laurent Lavergne is head of separate accounts at AXA Investment Managers - Real Assets, a subsidiary of AXA. AXA Investment Managers - Real Assets has about €76 billion of assets under management, the vast majority of which are based in Europe. S&P Global Market Intelligence sat down with Lavergne on the sidelines of the MIPIM property conference and exhibition in Cannes, France, to find out how one of Europe's largest real estate investors sees the market and where the best opportunities lie.
What follows is an edited transcript of the conversation.
S&P Global Market Intelligence: European real estate has seen record levels of investment in recent years. As one of the sector's largest investors, how is AXA Investment Managers dealing with the intense competition for assets and ensuring its investments are delivering attractive returns?
Lavergne: We are looking at manage-to-core strategies. We feel that core assets are really expensive currently. There are some players who have a really cheap source of capital, so they can afford to go for a very-low-yield asset. In that space we are not really competitive today; we don't feel there is good value for it.
We have teams on the ground everywhere in Europe undertaking some risk with repositioning assets, releasing assets. We have a long track record, and we know what we can do, what will be difficult. This space is a little bit less crowded because you need this expertise, you need this team on the ground.
What changes in capital flows to European real estate have caught your eye in recent months?
We are starting to see U.S. institutions interested in investing in core properties beyond the U.S. Previously, U.S. investors would say that if they are making the effort more to go abroad out of their home market, then they need an extra return. As an investment manager and portfolio manager, our view is a bit different: It's also for diversification because the markets are not synchronized in real estate. Diversification for us is a value in itself when you are managing a large portfolio.
Europe is providing two attractive features for U.S. investors. Firstly, Europe is later in the economic cycle than the U.S. The recovery is now really underway in Europe, but we are not advanced in the cycle, and generally speaking, real estate is really sensitive to the economy. On top of that, for U.S. investors hedging currency exposure, they're adding more or less a 2% annual additional return when you are converting your euro into U.S. dollar. Even if you are looking more to core and core-plus strategies, the returns start to be pretty attractive in U.S. dollar terms. So that could also be fueling the higher interest of U.S. investors for what appears to be lower-return strategies than what they have had before.
With the Eurozone economies now having made a full recovery from the global financial crisis, how is AXA Investment Managers adjusting its strategy to respond to the more favorable economic outlook?
The supply side has not been significant in Europe since the global financial crisis, and we have historically been doing a lot of developments, so we have a very strong expertise in that field. We are using a long-term source of capital, so compared to a developer who will not launch his development without a pre-leasing or a pre-selling of the asset to cover his risk, we are always developing to hold and not to let. So we have much more flexibility in managing or owning the property in the long run than a developer.
We believe we have an interesting economic advantage in that space currently. We are running something like €9 billion of development currently in our portfolios, which is a fairly big amount when you compare it to our equity real estate assets under management.
The U.K.'s economy was of course performing stronger than all other G7 economies prior to the country voting to leave the European Union in 2016, but has since fallen behind its peers. How has AXA Investment Managers responded to the change in the U.K. market and how does it plan to approach it in the years ahead?
Our view is Brexit is bad news, generally speaking, for the U.K. because it is creating uncertainty. But otherwise, the U.K. is still one of the largest economies in the world. London, where most of our U.K. investments are located, will remain one of the key cities in the world.
Brexit also potentially creates opportunities because at the end of the day, we have 12% of our AUM in the U.K., while Europe is probably 95% of our AUM, so in theory when you look at the real estate market size and size of the economies, we should be around 20% to 25% invested in the U.K. So I feel that my portfolio still has a lot of capacity to deploy there.
To a certain extent, I am ready to look at if there will be some opportunities because clearly some companies are under pressure. When you look to the listed sector, they are all significantly trading at below net asset value, so they may dispose of some assets. That can be creating an investment opportunity in the short term.
What U.K. opportunities are most attractive to AXA Investment Managers in the current climate?
We've acquired a number of hotels in the U.K., and we are targeting a specific type of hotel that is able to address both leisure and business needs. They are fairly resilient, especially when you are in a city like London that's attracting both tourists and business. It's an asset class we like very much, specifically for this city.
It's not luxury, but I would say the three- to four-star market. We don't want to be on the economy end of the market. I think in the economy space there is a lot of competition out there. There are questions about how Airbnb is impacting the sector, because basically it is very limited services provided to your customers. The three- to four-star we believe is more protected, and the really upper end of the market is very volatile.