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Blueprint: Inside KKR’s latest fund, AXA’s long view on life science, the lowdown on special servicers

How special servicers have worked to avoid a repeat of 2008; KKR's high hopes for its latest opportunistic fund; AXA's long-hold strategy for life science; and more in today's briefing, exclusively for our valued subscribers.

He said it

“I’ve been working from home for the last eight months and I have to say I actually hate it, profoundly and profusely. But I accept this is a marathon not a sprint.

Jose-Luis Pellicer, M&G Real Estate’s head of investment strategy and research, in the opening remarks of the insurer’s Global Real Estate Outlook webinar last week.

What’s new?

Numbers don’t tell the whole story 
Today, we publish our deep dive on special servicers, which have been on the front lines of real estate distress as an influx of troubled borrowers seek relief in the face of impending loan defaults. While the overall special servicing rate for commercial mortgage-backed securities loans reached a post-GFC high of 10.48 percent in September, according to data provider Trepp, the extent of potential distress is far greater. As Job Warshaw, head of special servicing at LNR Partners, tells us, special servicers during the current crisis have done a lot of workouts on loans that have not actually defaulted, in contrast to the last crisis.

See our first report today and check in through next week for follow-ons that spotlight some of the most important players in this space.

Going for three
New York-based private equity titan KKR is targeting $3 billion for its third opportunistic US real estate fund, according to documents from last week’s New Mexico State Investment Council meeting. The vehicle, Real Estate Partners Americas III, would be the firm’s largest real estate fund to date, besting REPA II, which closed on $2 billion in 2017. KKR will seek opportunities throughout the top 15 US real estate markets and track closely to its previous opportunistic vehicles, building on the firm’s industrial and student housing platforms, as per the documents. It also expects distressed situations to play a bigger role in this fund, particularly within the hospitality, student housing and senior housing sectors.

Going long 
AXA Investment Managers – Real Assets’ purchase of Kadans Science Partner from Oaktree Capital Management for €500 million last week was more than just Europe’s biggest life sciences real estate transaction of 2020. It also followed a private equity-style approach to real estate that the French insurer has favored of late. As John O’Driscoll, the firm’s European transactions chief told us, the investment was the fourth in a concerted strategy in the region to buy operating businesses in property asset classes where hands-on sector knowledge must extend beyond the real estate fundamentals. Indeed, Kadans follows AXA’s prior purchases of Data4, a French data center business [more on that here], Retirement Villages, a UK senior living business [more here], and Kley student housing, also from France [more here].

Big blind
Vestas European Strategic Allocation Logistics Fund is a rarity in the world of European-managed funds with Korean capital. The €200 million joint venture between London-based Savills Investment Management and Seoul’s Vestas Investment Management is structured as a blind-pool vehicle. Long known for investing via single asset clubs or non-discretionary separate accounts, Korean investors’ willingness to back the strategy alone speaks to the high conviction capital markets have in logistics these days.

Data snapshot

Ready for more
Among investors surveyed by Savills, 70 percent said they would keep their real estate allocations the same or increase them in the 12 months ahead.

Trending topics

Hybrid approach
Deutsche Bank AG is the latest corporate heavyweight mulling permanent changes in its remote working policies. The German bank is reportedly considering letting some of its staff work from home two days a week, according to Bloomberg. While no official decision has been announced yet, a hybrid home-office model appears to be the preferred scenario for a post-pandemic working environment. Technology firms have been leading the charge on this front, but an increasing number of financial businesses are jumping on the bandwagon. HSBC is advocating for more flexible working policies as it expands its cost-cutting initiatives, while half of Standard Chartered’s 85,000 employees will be reportedly allowed to apply for hybrid working arrangements by early next year.

Under pressure
Charter Hall’s flagship Prime Industrial Fund has added further proof to the pandemic potency as an accelerant. The firm raised A$2.6 billion ($1.9 billion; €1.6 billion) since April, adding 29 new investors during that stretch. But as the surging demand for logistics assets continues to fill the coffers of sector-specific vehicles, it is hard not to wonder what impact this influx of capital might produce in terms of yield compression in the sector. As the capital values for the logistics sector is getting closer to the values of traditional office assets, managers must consider how they should price the risk and return of the property type du jour.

People moves

Crowning glory 
Industry veteran Paul Clark is switching country allegiances – at least professionally. Clark, formerly chief investment officer at The Crown Estate, which manages Queen Elizabeth II’s public estate, has joined AustralianSuper as senior investment director of property. He will be responsible for Australia’s largest superannuation fund’s real estate investment activities in the UK and Europe. Clark’s hire is part of AustralianSuper’s buildout of its global investment team as it expands in London and establishes a New York location. He will be one of four new additions to the London team, along with head of equities Innes McKeand, senior investment director of infrastructure Philippe Lenoble and investment director Mikaël Limpalaër.

Investor watch

Exceeding expectations

The New Mexico State Investment Council is prepared to exceed its real estate investment target for the 2021 fiscal year. The sovereign wealth fund is already near its $300 million target with commitments of $100 million to Exeter Europe Industrial IV and $75 million apiece to AEW Partners IX and KKR REPA III. That number could hit $400 million as it looks to build its opportunistic portfolio and capture the promise of strong returns from the 2021 vintage year. “We retain the flexibility to be opportunistic around our annual pacing commitments to take advantage of vintage years that may present better-than-average opportunities,” spokesman Charles Wollmann told PERE. “As such, the next couple years may see additional commitments above the what the internal pacing model suggests.”

This week’s investor meetings

Tuesday, December 1

Wednesday, December 2

Thursday, December 3

Friday, December 4

Today’s letter was prepared by Kyle Campbell with Jonathan Brasse, Evelyn LeeArshiya Khullar and Christie Ou contributing

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