AXA IM Alts logistics boss targets UK expansion

AXA IM Alts is readying for a “second edition of the development wave” it carried out in the UK with its Baytree Logistics Properties platform in recent years, according to global head of logistics Thomas Karmann. Despite making some big investment plays late in the game, the UK remains “one of the tier-one countries” for AXA IM Alts’ open-ended European logistics fund alongside France, the Netherlands and Germany. Karmann wants at least 60% of the fund to remain located in those core markets, with the rest rounded off by the Nordics and southern Europe. Across the fund and Baytree, its UK locations include Milton Keynes, Leeds and Nuneaton. Karmann admits the asset manager’s timing on UK logistics acquisitions has not always been right, referring to the £391m portfolio it bought from a joint venture between Goldman Sachs and Canmoor two years ago. However, he emphasises that rental growth has offset much of the impact. “We have invested quite heavily in UK. We bought – unfortunately, not the perfect timing – a big portfolio at the beginning of 2022 that has suffered from value declines due to cap rate expansion,” Karmann tells EG. “But we had a very ambitious business plan for rent growth and reversion, and we are exceeding our expectations. We are leasing at higher rents than we thought.” The portfolio, valued at more than €3bn (£2.6bn) in December, focuses on fulfilment centres, warehouses and delivery and last-mile hubs. Karmann says the portfolio has captured 15% rental reversion in the past year, while 89% of its portfolio is indexed. Development focus Now the focus in the UK will be on acquiring sites for speculative development, rather than standing assets. “There will be a good window for development,” says Karmann. Portfolio acquisitions have been ruled out for the near future, with Karmann citing a “good allocation” as well as the need to hedge currency risk. Through Baytree, AXA IM Alts is bidding on “several” land plots in the UK, with two at investment committee stage. “We see really good opportunities there,” says Karmann, adding that sites are coming to market at “much more reasonable rates” than two years ago, in some cases 40-50% lower than before. “I wouldn’t say they are distressed sales, like we had in 2009,” he adds. “Nevertheless, there are developers who are not able to develop their projects and need liquidity. There are also deals that were under offer that have fallen apart because the previous tender winner didn’t get financing or hasn’t got the cash or the courage to launch their programmes.” He says AXA IM Alts has been discerning about choosing its locations, pointing to a speculative scheme in Leeds. While there seems to be oversupply for big boxes in the north of England, there is a lack of small and mid-sized buildings nearer city centres. Work on two warehouses measuring 76,231 sq ft and 145,454 sq ft is under way, to be followed by a further 329,583 sq ft build-to-suit facility. The investment manager wants to deploy “several hundred million” euros across the 11 countries in its portfolio, although this depends on the success of its acquisition and disposal strategies. “We want to dispose at the right price – we will certainly not sell anything at a loss,” Karmann says. Some disposals are planned in Italy, Germany and France. None will be in the UK, says Karmann, since those properties are either newly built or in compelling locations. “We have very high ESG and decarbonisation targets from our parent company, so we are recycling assets that are old, that don’t meet our ESG criteria and that we cannot bring up to speed in the short term,” he adds. Restarting the machine Karmann believes transactional activity will return in the second half of the year, with the market now largely past the turmoil from revaluations in the previous 18 months. “Values have stabilised and we are back in positive leverage territory, which means investors are really looking into deploying capital in logistics again. The fundamentals for logistics in Europe remain absolutely solid,” he says. “Cap rates are now not only stable, but above their long-term financing rates,” he adds. “We had a decline in take-up numbers of around 25-28%, but we are simply back on a more sustainable level of demand like we had in 2019.” The fund’s draft valuation for the first quarter has inched up by 0.07% compared with the previous quarter, says Karmann. For him, it is a sure sign that the market is ready for a comeback. “We have been stable since Q3,” he said. “It shows the market has stabilised, and now the portfolio’s net initial yield is more or less at the cap rates where we see transactions happen. You can assume the market will restart, on this basis.” He adds: “We are now in a phase where we have discussions with investors, pension funds and insurance companies that have cleaned their books and looking again at deploying capital in real estate, particularly in logistics. The machine is just now only starting.”