Antonio de Laurentiis, the global head of debt at Paris-based AXA IM Alts, believes the coming year will be one in which lenders focus more on shoring up their portfolios than originating new loans in a volatile environment.
Speaking to Real Estate Capital USA at MIPIM, the global real estate conference held last month in Cannes, de Laurentiis took a pragmatic view of a situation in which interest rates continue to be on an upward trajectory around the world and sponsors are coming up against a wall of near-term maturities.
“We believe asset management will be a pivotal theme this year as lenders look to protect their books, look to protect their exposures, and speak with borrowers and help them get through refinancings,” de Laurentiis said. “Very realistically, there will be extension requirements and covenant breaches.”
De Laurentiis spoke against the backdrop of an increase in conversations about the record maturities the commercial real estate market will be facing over the next two years.
“In terms of losses, we believe we are quite protected by the institutional nature of the borrowers we work with. Who you do business with is quite fundamental, as well as knowing how people behave in stressed situations. You want to have like-minded people,” de Laurentiis said.
The focus on asset management is also a practical one, given the prolonged standoff between buyers and sellers on valuations and borrowers and lenders on pricing and proceeds.
“Buyers are waiting to see who blinks first. I have the sense there will be some form of forced sellers who need some form of liquidity and will start to sell their most liquid assets,” de Laurentiis said. “But it may be difficult to determine if people are still in the money on some assets, and they will try to wait a little bit, unless they are under immediate pressure from banks or it is the right moment in the market to sell.”
AXA IM Alts, a relative value investor, is active in four quadrants of the institutional commercial real estate market: direct equity, listed equity, public debt and private debt.
“We believe this allows us to offer a 360-degree approach to the market and translates into the ability to offer investors allocations across different formats during different parts of the cycle,” de Laurentiis said. “Institutional investors can have liquidity issues and may need to switch allocations over the medium- to longer-term. You don’t want to be forced buyers or sellers and need to be flexible and look across geographies, sectors and formats.”
Amid last year’s volatility, the firm took a step back. “We slowed down our investment pace last summer because we thought pricing was too tight and aggressive for us, bearing in mind our ultimate investors are pension funds and insurance companies, and relative value is key in the decision process,” de Laurentiis said.
While the firm invests in public REIT debt, the real estate division does not buy commercial mortgage-backed securities. AXA IM Alts’ commercial real estate debt platform avoids the CMBS market on account of the distance from the borrower as well as a potential conflict of interest between the bondholders and the borrowers, de Laurentiis added.
“Our real estate debt platform does not invest in CMBS because we value proximity to a borrower and a simple capital structure. It may be old-fashioned, but we believe it is easier and better. This helped us to have zero defaults during covid because we were able to have direct discussions with borrowers,” he said.
De Laurentiis sees a rare opportunity for alternative lenders to increase their market share as banks withdraw from the market due to concerns about the impact of a highly anticipated correction to commercial real estate values on their lending books.
“This is an interesting entry point for alternative lenders,” de Laurentiis said. “Today, flexibility on capital allocation in terms of risk appetite, timing of deployment, geographies and asset classes is even more relevant. We have the power to deploy capital, but it is all a question of timing, the ability to be flexible in the allocation and relative value assessment.”