Axa sees French property promise over UK

LONDON (Reuters) - Cut-price commercial mortgages and French homes and offices have caught the eye of Axa Real Estate Investment Management, but the property arm of the French insurer is giving London's stricken office market a wide berth.

Steve Smith, head of transactions and asset management at Axa REIM (AXAF.PA), said his firm may resurrect plans to float a French real estate investment trust investing in French housing, and launch a third French office development fund when frozen property markets showed greater signs of thawing.

"We came within minutes of launching (the housing vehicle) before pulling it about 18 months ago. That may come back," Smith told the Reuters Global Real Estate Summit on Monday, without offering a timescale for a second launch.

He also said plans for a real estate debt fund were afoot, following the successful acquisition of about 1 billion euros ($1.39 billion) of discounted real estate debt in recent months.

"We are seeing a lot of value in this market today but again the issue for us is the same one as in the direct market. We have to be clear the market has stabilized before extolling the virtue of any asset-backed security and so far we can't honestly say we are seeing that yet," he said.

Smith said he felt the UK commercial property market was likely to rebound first in Europe after suffering price falls of almost 45 percent in just two years, but the City of London office market has lost its luster, possibly for good.

"The City of London is a very painful place for some landlords, and there are some very good deals on offer for tenants," he said, adding that Axa sold its last major holding in the City of London in 2007.

"We have taken the view for a long time that this is not just a cyclical change in the City of London, it is something far more profound," Smith said, citing the emergence of Canary Wharf and the historic underperformance of the market versus other segments.

"You have to ask yourself -- even if London remains a pre-eminent location for banking -- are you going to see (upward) pressure on rents? The answer is not really."

While he expected the UK to re-emerge from its slump faster than some other markets, Smith said he didn't see a general property market recovery in the near future.

"There is a lot of talk about greenshoots today because we have seen a few good quality assets sold at prices that seem to be marked down slightly from a couple of months ago. But that is not a recovery, a recovery is when people look to take space and we've seen little sign of that," he said.

ARRESTED DEVELOPMENT

According to figures compiled by the European Association for Investors in Non-listed Real Estate funds (INREV), Axa REIM is Europe's biggest real estate fund manager with about 40 billion euros of assets under management.

Like many of its peers, Smith said the shortage of debt had choked Axa REIM's continued growth, with several fund launches and the group's expansion into Asia mothballed pending recovery in the market.

Most experienced investors were familiar with the cyclical peaks and troughs inherent in property investment, but real estate had become a much tougher sell to recent market entrants.

"A lot of people were advocating the merits of real estate on the view that there was going to be limited volatility in markets and that has proved to be a bit of a dud. That impression has been exploded in a few short months," Smith said.

"Through 2005, 2006 and 2007, we were averaging around 7 billion euros of transactions a year, clearly that has fallen away drastically."

Smith said European investment activity was largely confined to assets valued at 30 million euros or less, and it was almost impossible to find any bank willing to back deals worth 100 million euros or more because of reluctance to syndicate loans.

"We have around 1.2 billion euros of capital to invest ... As and when we can spend that money, we will but it does to some extent depend on credit," Smith said, adding the majority of Axa's real estate funds were about 50-60 percent leveraged.

Of this 1.2 billion euro warchest, Smith said the firm had some 400 million euros of equity to spend on behalf of investors in its Alternatives Property Income Venture fund which targets automotive, healthcare and leisure property.

It has a further 120 million euros to buy higher-yielding property for its European Added Value fund.

While a keen champion of the fledgling property derivatives market, Smith said Axa's property swap deals was largely on ice.

"We are a keen proponent of property derivatives but this has not been a tool we have deployed in the recent period," Smith said.

"Getting enough volume in the market remains a key issue, as well as finding a position that is sufficiently unstable for everyone to have a different view. Perhaps these dimensions will develop over time," he said.

(Additional reporting by Cecilia Valente; Editing by Andrew Macdonald)

($1=.7216 Euro)