A month after AXA piled £300m into the City of London’s most famous stalled skyscraper, Mike Cobb speaks to Anne Kavanagh about the fund manager’s development drive. Portrait by Tom Campbell
With €54bn (£29bn) of real estate assets under management across 23 countries around the globe, when AXA Real Estate Investment Managers decides that developing is now more important to its model than buying core, it is worth taking note.
After a long history of real estate investments associated with buying core, prime and fully let buildings, the French insurer and pension fund manager has changed tack and upped its investment in development – it is currently undertaking 70 projects across Europe with an end-value of €8bn.
No project has had a higher profile than The Pinnacle, EC2. AXA bought the stalled tower in February for £300m on behalf of a consortium made up of British Colombia Investment Management Corporation, PSP, Temasek and two of its managed funds.
Driving sustainable returns in the markets AXA is typically associated with is becoming increasingly difficult and in order to ensure returns are maintained the company is making new plays in areas such as debt, logistics, value-add and alternatives.
“We don’t think buying core is the place to find value at the moment,” says Anne Kavanagh, global head of asset management and transactions. “We think that there is more value
in developing to core. So, 22 Bishopsgate – that is what we are calling the site at the moment – is part of that strategy.”
Although Kavanagh declines to comment on the identity of the investors involved in The Pinnacle, she says that being an experienced hand in development has helped attract Asian investors that understand the way projects such as these work in their domestic markets and are looking for higher returns than those available through straight investment in Europe.
“I think a lot of the Asian companies are quite used to doing development,” says Kavanagh.
“We felt that the [Pinnacle] opportunity was compelling and that on a risk/reward basis, the returns were attractive. It is part of a broader strategy at AXA. In a low-inflation climate, or deflationary environment, we think depreciation is becoming a bigger and bigger issue. And, therefore, we think development, and particularly developing core buildings – or, on the value-add side, moving buildings to core – is a very strong theme.”
Across London, AXA has invested in the development of more than 1m sq ft in the past four years, Kavanagh estimates. Highlights include the forward-funding of the 365,000 sq ft 6 Pancras Square at King’s Cross Central, NW1, which was developed by BNP Paribas Real Estate and has been let to Google, and the 160,000 sq ft 6 Bevis Marks, EC3, which the company is in the process of leasing.
The breadth of AXA’s clients means that the fund manager has to have a large variety of strategies it can offer to them. As a result, about 60% of clients make more than one investment.
“About 50% of our business is for AXA insurance companies around the world, and 50% is for third-party clients, which consist of 160 institutional and pension fund investors,” Kavanagh says. “And our investment strategies cover a broad range, from core to opportunistic strategies and everything in between.”
In London Axa has been moving further up the risk curve by taking on buildings outside of the centre of the city or those with letting risk for a value-add strategy.
“We recently bought the HarperCollins building in Hammersmith [from Nordea Property Investment in October last year for £82m] and we just completed on St Andrew’s House [from CBRE Global Investors in March for £32m]. That is part of the value-add strategy we think is compelling and we are operating across Europe,” says Kavanagh.
In addition AXA will pursue more alternative styles of investment, particularly in the data centre and healthcare markets.
“Data centres are a growing sector,” explains Kavanagh. “In the US, it is an established investment sector. In Europe, it is still in its infancy. And the same with healthcare.
“We like the cash flow and we understand the real estate, and I think to invest well in those sectors you need private equity skills and expertise, and we’ve got that within our platform. It is the same as hotels – you need to understand the operating businesses.”
This is also why AXA launched Baytree Logistics Properties in March. The business is a development arm that will source and undertake projects for AXA clients in the logistics sector. It has an initial commitment of €100m and is headed by former Gazeley chief executive John Duggan.
“The Baytree team specialises in that area,” says Kavanagh. “They built a great track record in their former business [Gazeley], and we are working very strongly with them on a number of opportunities.”
One of the most successful strategies AXA has embarked on has been in the real estate debt space. In March it completed a second close of its €2.5bn Commercial Real Estate Senior 9 Fund, taking commitments to €1.5bn. The platform, led by head of fund groups and debt investing Isabelle Scemama, raised a total of €3.7bn for the platform last year.
“The debt team is active right across Europe, and the debt platform comprises broadly €10bn,” Kavanagh says. “Our teams are very, very active, and we anticipate doing about €4bn of debt per annum, lending in the senior space.”
Unlike the direct investment strategy, debt funds can attract an entirely new type of investor.
“A number of the investors that are invested in our debt platforms are fixed-income investors,” she explains. “We are acting for a number of investors around the world and we are looking at different strategies.”
Kavanagh says AXA’s main strength is the diversity of its team across the globe. “Coming out of a tough financial period, we have worked well as a team and I think that we have capitalised on the opportunities,” she says. “More broadly, we have been investing about £3bn per annum. And those investments we made two or three years ago are really performing well for our clients.”
