Aviva Investors has launched the UK Real Estate Recovery II Fund, an ungeared fund that will invest in UK commercial real estate with a focus on secondary assets.
The fund, which will target a return of eight to 10 per cent per annum (net of fees) and a distribution yield of six to 6.5 per cent per annum, has completed a first close of circa GBP90m and has a target size of GBP250m.
The fund will be managed by Anna Rule, manager of the UK Real Estate Recovery Fund which was launched in 2009 and raised GBP223m investing in 17 assets over the course of a year. The new fund will carry out intensive asset management, such as lease regears and refurbishments, to positively reposition each of its assets and will opportunistically sell assets once individual business plans have been completed and maximum value realised. The fund has a life of five years.
Ben Stirling, managing director, European real estate at Aviva Investors, says: “The investors in the fund have been attracted to the unusually high yields offered by the secondary market, which look attractive relative to prime real estate and other low-risk asset classes. Market sentiment to secondary assets is now strengthening but we see good opportunities to secure assets over the fund’s initial 12 month investment period. We expect our sector specialist asset management teams to be able to create value for investors through active asset management alongside the ongoing market repricing of secondary assets.
Rule says: “We believe there is a current short-term opportunity to take advantage of the pricing gap between secondary and prime real estate. In this fund we will be looking for assets in good locations but where there may be one indicator of stress, such as a short unexpired lease term. It is these assets which we will be able to actively asset manage and provide value enhancement through regear opportunities, refurbishment or change of use.
“This is a strategy designed to capture the outperformance of secondary real estate. On a risk-adjusted basis, it is segments such as industrials and offices outside of Central London that currently look the most attractive. Yields are high in these sectors by historical standards, and are particularly so, relative to prime real estate and other low-risk, income-producing asset classes; we believe we are in the early stages of a recovery with yield compression driving strong returns over the next few years.”
Aviva Investors manages over GBP22bn in real estate assets.