Real estate over the last five years has offered many opportunities, investing with equity when the debt markets were closed and offering senior debt to fill the void in the market.
With the benefit of hindsight the decisions of that time look easy, but after the financial crisis decision making was extremely challenging.
Returning from Expo after 48 hours of positive market sentiment but with many press articles calling time on the market in London made me reflect on the coming five years. Today’s market presents us with a different set of decisions to make, with investment volumes this year likely to exceed the previous peak in 2007; yields are at historical lows and debt is available.
In terms of real estate cycles, it feels like investment is a long way through the up cycle, with external economic factors and geopolitical risks creating an increasingly volatile and challenging environment. Meanwhile, the occupier market cycle seems to be at the start of an upswing. Rental values have been rising in the main European cities for prime office and retail stock and momentum is spilling over into more secondary areas. However, with the exception of a few markets - London and Dublin, for example - growth has been far more moderate than typically seen in previous recoveries.
Our strategy continues to evolve as we move through the market cycle; we are taking on more risk in the short term with the aim of maximising gains from the occupier markets’ moderate recovery. With the return of the occupier, we are very focused on responding to the locations and formats of the future. The urbanisation trend is a global phenomenon, but the impact at city level is uneven, creating winners and losers. In Europe, the larger dominant cities are benefiting from growth and demographic trends as young talent is moving towards vibrant dynamic cities offering greater employment prospects alongside cultural and social amenity. London has been a huge beneficiary of this trend.
In logistics, the market is changing rapidly in response to changing consumer patterns enabled by technology. We are experiencing very strong demand for new stock in strategic locations and, in response, earlier this year we launched a logistics and industrial development platform, Baytree Logistics Properties. Baytree’s focus is to develop build-to-suit and speculative stock in the UK, France and Germany. The lack of development before the crisis and the growing obsolescence of existing stock means the forecasts for future performance look attractive.
Overall, refurbishment and development have become a key element of our strategy at this point in the cycle. Across our portfolio, the refurbishment and development pipeline includes circa 70 projects. Develop to core is increasingly popular in today’s market, with core asset pricing at all-time highs.
As we envisage staying in a low-inflation and low-interest-rate environment in relative terms, the second element of our strategy is more long term and income focused. As we move further through the cycle, low-risk and defensive options for the future are attractive. The alternative real estate sectors and long leases on traditional assets are providing a source of stable income, which investors find appealing. We have been active in these areas and will continue to be so with investments in hotels, hospitals and forests as well as with our infrastructure investment programme.
As the cycle progresses, we will continue to increase our exposure into alternatives. Our intent is clear with our own rebranding; we are now AXA Investment Managers - Real Assets. In fact, I expect the differentiation between what is traditional and alternative to become less relevant. The important factor will be in correctly defining what is a ‘growth’ investment and what is ‘defensive’, what is ‘risk on’ and what is ‘risk off’.
The next five years will present a different set of challenges to the post-crisis period; the advantage of investing globally where cities are at different stages of evolution helps us to find value throughout the cycle. This, combined with a focus on meeting the needs of future occupiers in both location and format, should mean we can continue to provide attractive investments for investors.
Anne Kavanagh is global head of asset management and transactions at AXA Investment Managers - Real Assets
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