AXA Real Estate Investment Managers, the global real estate manager, is on track to beat its €2bn year-end target, taking its European real estate loan book to more than €5bn in three years.
Such are the scale of opportunities – through originating senior loans, buying syndicated senior positions, as well as performing loans – that AXA Real Estate believes it could invest more than the €2bn so far raised by returning to investors, which include insurance companies and pension funds, for more capital.
AXA Real Estate, like many of the emerging new senior lenders, is interested in the senior space up to 60% to 65% LTV across prime and good secondary European markets, with its key markets the UK, Germany, France, the Netherlands and increasingly the Nordic countries.
In terms of deal size, AXA Real Estate can lend up to €150m in a single transaction – but this can be doubled to €300m in a single deal by bringing on board some of its clients’ segregated closed investor clients.
The broad plan for the year is €2bn spread a third each in the UK, Germany and France, with the pipeline to cover the capital already identified. This would suggest AXA Real Estate’s UK lending appetite this year is around £550m, after £850m last year, as the fund manager seeks to rebalance the geography of its European real estate loan book.
Pricing senior debt for AXA Real Estate is entirely relative to risk, in comparison with yields available in other asset classes, plus an illiquidity and complexity premium. For loans equivalent to high investment grade, in credit rating terms, today AXA Real Estate would seek at least 250 basis points. By comparison, for equivalent low investment grade, the margin is more like 400 bps to 600 bps.
Much has been said about the golden era for senior debt lending driven by a huge lack of availability set against a monumental – even somewhat daunting – refinancing challenge ahead. Just in the next three years alone there is almost €500bn – €180bn this year; €170bn in 2013; and €125bn in 2014.
In addition, in the securitisation market almost €10.7bn of CMBS loans will mature in 2012. So far, of all European CMBS loans which have reached maturity only 27% have been repaid.
This refinancing quantum, alongside the impact of retreating banks and regulatory requirements – including Basel III and the FSA’s controversial slotting requirements – is forcing up traditional bank lenders’ funding costs. The net effect of which, is that the cost of senior debt which finances the bulk of real estate investment has never been higher and shows no sign of falling in the coming years.
Those with the capital to lend, therefore, can price senior debt at margins which are hugely attractive on a risk-adjusted basis, relative to real estate equity investments, and indeed even other asset classes.
But AXA Real Estate’s interest in senior debt lending, in fact, predates this golden era. It raised €1bn from a pool of insurance companies seeking credit risk diversification back in the pre-credit year of 2005 which, the fund manager admits, in hindsight, was probably the worst of times to begin.
As a result of the crisis, AXA Real Estate made the decision to only invest half of what was raised against real estate in the UK, France and Germany – three of the fund manager’s four dominant markets to this day. Instead, AXA Real Estate held back from investing the remaining €500m until four years later. AXA Real Estate used these inactive years as European direct real estate markets, to varying extents, went into free fall with both property and debt re-pricing, to build its operational debt platform.
The real estate debt platform AXA Real Estate built enables the fund manager to invest as easily for clients with segregated pools of capital, as for those clients’ capital which is invested from its pooled real estate debt fund.
Then, in early 2009, AXA Real Estate began investing in single loan-backed European AAA CMBS bonds, building a modest circa €200m book.
In the second half of 2009, AXA invested around €200m, which included re-investing returned capital from its early 2005 deals, and then in 2010, AXA Real Estate returned to more active senior lending, investing circa €500m in senior debt across six deals, predominantly in the UK – all of which were at least 200 basis points over LIBOR and EURIBOR, respectively.
AXA Real Estate really started to flex its muscles in 2011 when it invested as much as €1.5bn, of which around €1bn was against UK real estate. Around €900m of last year’s lending, or 60%, was in secondary markets – taking syndicated positions and buying performing loans from deleveraging banks. In both respects, AXA Real Estate has partnered with all the major lending UK, French and German banks. The balance, €600m or 40%, was in primary senior loan origination, which AXA Real Estate expects will even out to 50:50 this year.
Much more important than whether AXA Real Estate is primary underwriter or loan participator is that the deal meets the requirements of its underlying insurance clients, both in terms of voting rights and risk-adjusted returns against a strict criteria in respect of the quality of the real estate and the tenants’ covenant strength.
The early focus on the UK has taken the market’s loan book weighting to around 50%, leaving Germany underweight, which AXA Real Estate expects to rebalance in time, with an eye on the significant opportunities in the German multi-family market.
Whether AXA Real Estate becomes a €2bn to €2.5bn annual senior lender this year will depend entirely on how markets unfold from here, but few would bet against the global fund manager taking a back seat anytime soon.