AXA IM - Real Assets pivots to development projects and ‘alternative’ assets on prospects of slowing returns, CEO Scemama says

Prospects of slowing investment returns have led AXA Investment Management - Real Assets, a global leader in real asset investments and Europe’s largest real estate investment manager, to pivot towards development projects and assets such as senior housing that offer long-term rental growth prospects, CEO Isabelle Scemama said.

Isabelle Scemama

Isabelle Scemama became CEO of AXA IM – Real Assets in February 2017. Sixteen years earlier, she had joined the company to head its real estate fund structuring and financing unit, going on to launch loans platforms for real estate and infrastructure. This came after 12 years working in finance at Paribas follower her graduation in 1989 from IEP Paris (Sciences Po).

AXA IM - Real Assets expects generalised price gains for prime real estate assets to slow, which will cause total investment returns to moderate from the double-digit levels that investors have enjoyed over the past three years. The Eurozone, which has lagged behind the other main global investment markets, may outperform through to 2020 by generating annual returns of about 5.1%, the investment manager predicts.
“At this point in the cycle our strategy is to bet on rental growth,” said the Paris-based executive who was promoted to CEO of the Paris-based investment manager in February last year. High prices mean “it would be dangerous to bet on yield compression today, so we are focusing on sectors offering the potential for rental growth, which is the case for the so-called alternative assets and sectors about which we have strong convictions.”
Half of the EUR 5.8 billion of acquisitions made by AXA IM - Real Assets, on behalf of its clients, in the private and public equity markets last year were residential assets, healthcare properties and logistics warehousing – sectors subject to long-term secular trends and, therefore, more insulated from the investment cycle.
Notable transactions on behalf of clients include the EUR 1 billion purchase of a portfolio of 39 logistics warehouses, which provides exposure to e-commerce, convenience shopping and evolving trends in the supply chain. The opportunity presented by Europe’s ageing population lay behind the purchase of the UK’s Retirement Villages Group, complementing previous acquisitions of senior housing in Germany and Finland. AXA IM – Real Assets also joined a joint venture to acquire the Resa portfolio of student residences in Spain on behalf of its clients.
“At the end of the day, these are trends in which we strongly believe and where we have taken big positions – because you need scale in these asset classes,” Scemama said.
AXA IM - Real Assets has also stepped up developments and building refurbishments with an EUR 9 billion pipeline of projects across property asset classes that includes 22 Bishopsgate, an office tower in the City of London.
“We have the capabilities in-house and can leverage the experience and expertise that we have built up over decades to capture the development gains and lift returns,” she said.
Delivering new space is more than a matter of bringing fresh product to the market since tenant demand is changing rapidly. “We can see this with large occupiers who want less space and are heading towards more flexible and modern space with technology integrated, so development is the way to respond to this demand,” she said.
As an example, Twentytwo is a 62-storey office tower under construction that will integrate more than 100,000 ft2 of amenities and social spaces – including a fresh food market, a wellbeing retreat and spa plus London’s highest free public viewing gallery – alongside the modern and flexible office space.
Aside from shifting to developments and long-term income growth in its investments AXA IM - Real Assets is also taking a more disciplined approach to capital-raising. The investment manager raised EUR 6.6 billion last year, down from EUR 8 billion in 2016.
“We are being quite cautious about raising more capital, capping each of our strategies according to our ability to deploy it,” Scemama explained. “We are looking to steer our clients toward pooled funds so that they avoid competing for the same assets. It allows them to access the best of what’s available in the market – I don’t want to find ourselves with one asset that would suit ten clients and make them all stand in line to buy it.”
Pooling capital has allowed AXA IM - Real Assets to rationalise its range of products and concentrate on larger lot sizes when making acquisitions, particularly in ‘alternative’ real estate sectors where scale is important. It was notably the case with the EUR 1 billion purchase of the Gramercy logistics warehouse portfolio.
AXA IM - Real Assets has more than 200 institutional clients plus a range of funds for individual investors. Its products cover all four quadrants of the real estate market (the public and private markets for debt and equity), which allows it to identify arbitrage opportunities and provides a holistic overview of real estate markets. Scemama calls it the “3600 view of real assets.”
Listed real estate assets total EUR 3.6 billion, or 4.7% of AXA IM - Real Assets’ EUR 76 billion assets under management at the end of last year, and Scemama sees a growing role for property shares in portfolios designed for investors who require greater liquidity than is available from direct property investments. This partly reflects the structural shift in pension plans to defined contribution programmes and away from defined benefit, she said.
The investment manager’s 3600 approach to real estate investing means the listed sector is a building block in a fund’s portfolio construction, combining some or all of the four quadrants of real estate according to the investment strategy. AXA IM - Real Assets manages an EUR 4 billion hybrid fund designed for retail investors, where half the capital is invested directly in properties and the balance is divided between cash, listed debt and equities.
“Through this, we aim to manage liquidity and manage the long-term yield with less volatility,” she explained. “We really believe in these products because there’s great demand for them.”
Another product is 60% invested in REITs and 40% in real estate debt to effectively hedge the volatility caused by the listed companies’ leverage. “We are able to replicate, for the most part, the underlying performance of the direct real estate market by counter-balancing this volatility and capturing the upside from equities. Of course, we can create alpha through stock-picking,” she explained.
Scemama looks back at the past 16 months since her appointment as CEO as a preparation period for the end of the current investment cycle as interest rates rise with an inevitable impact on real estate.
“My ambition is less about growth in volumes and more about looking at our investment processes and this 3600 approach, in which I very strongly believe, so that we are first in class in terms of performance,” she said. “I am quite confident about how and where we are positioned at the moment for where we are in the cycle.”