Timothé Rauly, head of funds group at AXA Investment Managers – Real Assets, explained to Real Estate Capital last week why his firm has acquired a $9.4 billion US commercial mortgage portfolio and 24 staff from Quadrant Real Estate Advisors.
While the acquisition gives the real estate investment management arm of the French insurance giant further access to the US, the largest debt market in the world – which it initially entered in 2014 through its in-house lending programme – the deal also offers AXA IM the ability to be more selective when sourcing deals, Rauly argued.
Across Europe, lenders with predetermined debt strategies face the challenge of finding loan deals that fit their desired criteria as competition intensifies. For some debt providers, the response has been to move up the risk curve into property sectors and parts of Europe where debt liquidity is scarcer than in the traditional space. Some lenders’ capital bases or investor mandates encourage this higher-risk lending. But for many, the aim is to keep doing business without compromising risk appetites.
Through the Quadrant deal, AXA IM has bought itself significant exposure to the US real estate debt space, in the process expanding its debt playing field. While its strategy does allow it to lend against an element of value-add and transitional property, it remains very much focused on senior lending to prime properties, with loan-to-value ratios typically between 40 and 60 percent. Although Quadrant’s lending encompasses higher-yielding activities such as mezzanine finance, the book AXA IM has bought fits with its conservative strategy, with senior fixed-rate, long-term debt a key attraction for the firm.
AXA IM’s ability to remain selective amid an increasingly competitive lending environment is also helped by the fact it is aiming to maintain, rather than grow, its real estate debt portfolio. In line with this goal, the firm’s deployment has reduced year-on-year. In 2015, it invested €4.5 billion in real estate debt, then €3 billion in 2016, and €2.18 billion in 2017.
By focusing “on the right assets at the right moment” according to the firm’s risk profile, performance is expected to improve by 20 basis points to 30bps, Rauly explained, as a result of cherry-picking deals. Currently, the firm’s CRE Senior 10 debt vehicle is achieving a return of around 200bps over three-month Euribor.
AXA IM’s choice of the US as the market in which to expand its lending reach is also significant. European lenders including Germany’s banks have viewed the US in recent years as the natural hunting ground for more of the types of senior loans they write in European markets.
America’s real estate debt space is also competitive, meaning European lenders’ success Stateside has been limited, however. But the fact AXA IM has opted to broaden its horizons in the US via the M&A route will help it compete there. Quadrant is a respected player in the US with a significant origination network in the country; AXA IM now owns some of that local market expertise. At a time when lending margins across most developed markets are coming under pressure and lenders’ costs are rising, it is likely we will see more debt managers acquire to expand in markets including the US, but also in Europe. LaSalle Investment Management’s purchase of a majority stake in US real estate debt manager Latitude Management Real Estate Investors, announced earlier this month, is another example of such activity.
AXA IM’s Quadrant acquisition highlights the benefits of scale in the real estate lending space. Overall, the deal demonstrates that property debt providers value the ability to position themselves to remain selective at a time when many are chasing the same deals.
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