Aviva Investors has had a “reboot”, with a new leadership and business structure. Here CIO Mark Versey and real estate MD David Skinner explain the strategy that could put the firm ahead of the curve.
Ask the country’s top investors or agents in a quiet bar or meeting room their view of Aviva Investors and the likelihood of them saying “dynamic” or “ahead of the curve” is pretty low. There is a much greater chance that you might hear them utter “sleeping giant” or “oil tanker”.
For that reason the company has had what it calls a “reboot”. Following in the footsteps of the likes of Legal & General, BlackRock, JP Morgan and Axa, last May it integrated its real estate and infrastructure divisions, both debt and equity, to work together as one £43bn machine named Aviva Investors Real Assets.
That came at the same time as Aviva sold off its indirect real estate investment business to LaSalle Investment Management, and with it went Aviva Investors’ US-based chief executive of global real estate Ed Casal.
The new(ish) division is now led by chief investment officer for real assets Mark Versey (pictured left), who was previously head of global investment solutions for the firm, and David Skinner (right), managing director of real estate strategy and fund management. Versey reports to Aviva Investors chief executive, and for the avoidance of doubt “the only chief executive in the company”, Euan Munro.
As part of the continuing refresh, some long-standing names have left the business. Andrew Appleyard, head of residential and alternative real estate, departed last September after 15 years, while head of central London Neil McLeod and director of central London offices Chris Perrott have left the business over the past couple of months. As a result, the era of Ian Womack, the company’s global real estate chief executive until 2015, is starting to look like a distant memory and the fund manager appears determined not to be stuck in the past.
To ensure that, it has been bringing in a wave of fresh talent. The business has hired more than 50 people since the formation of the new division, including Daniel McHugh, head of UK real estate; Melanie Collett, head of real estate asset management; Adrien Beuriot, head of continental European asset management; James Stevens, head of development; Stuart Cranna, head of real estate services; and Mark Meiklejon, head of real asset global investment specialists.
£7bn a year growth target
Now it has most of the pieces in place, Aviva Investors is focusing on hitting its target of growing by £7bn a year. Market participants should therefore be keen to reacquaint themselves with this sleeping giant and its new-found ambition.
With its UK portfolio by its own admission somewhat hamstrung by investor caution over Brexit, in order to grow, it is looking to ramp up its European activity and attract more external, segregated mandates outside of the wider Aviva group. Just over half of the real assets division’s assets under management are for external clients, with the remainder from Aviva.
Versey says: “We have gone through a strategy revamp and it is worth explaining what that is. The rationale for bringing it together was that a lot of our institutional clients look at these markets as a whole and in bringing them together we have huge scale.”
He is keen to stress that the alternative income business is fully integrated, rather than just lip service, all located on the ninth floor of the company’s headquarters at 1 Undershaft, EC3, with one profit and loss account – “we all live or die together”.
Of its £43bn of assets under management, around half are direct real estate and half private debt, of which around half of that – in the region of £10bn – are loans held against real estate.
The largest growth has been in the debt segment, led by managing director of alternative income Barry Fowler. Having started the initiative five years ago, initially investing for the wider Aviva group and subsequently for external clients, it has seen 40% growth in the past three years.
With the market considered by many to be “late cycle”, many investors are opting to invest in debt as it provides a greater cushion than equity investing and, although it has limited upside, can provide the same income yield.
“If we issue debt at a 75% loan-to-value, which is above the level of many banks, we have a 25% cushion and we get the same yield as if we owned the property,” says Versey. “Yes, there is no upside, but you have limited downside risk. Working together, we can look at it through an equity lens and think, yes, that is a fundamentally good piece of real estate, maybe I wouldn’t buy it at that yield, but it is a cracking asset and I can lend on it.”
Europe is currently the focus of Aviva’s expected real assets growth, and where around £10bn of its £44bn of assets are located. It is making a particular play for the value-add sector and is anticipating new products and funds in line with it.
Versey says: “We want to be one of the top assets houses in Europe, taking what we know and building on it. A lot of what we are doing is powering up our capability in Europe and then distributing to global pension funds and our big growth area is the value-add real estate sector. That is where the external demand is at the moment, so that is our focus for the next year and we can follow up with the UK when the time is right.”
At present, the time is not quite right in the UK. Brexit-fuelled uncertainty among large external investors has seen them hit the pause button on dedicating large amounts of value-add capital just yet. This is somewhat to the frustration of Skinner, who says Aviva has the perfect portfolio of opportunities, particularly those with a development slant, which would be ideal for such capital.
“We have in the UK a lot of assets that need developing that could provide huge upside potential for our customers and there is a great opportunity with the UK business to do more value-add stuff. We have the assets and development approvals, but Brexit is stopping us focusing on that as our core strategy. That would be our number-one strategy today without Brexit, but it is without external demand as there is still a wait-and-see approach from global investors,” he says.
UK strategy
That is not to say that Aviva has lost its focus on the UK. It is still deploying core capital for existing mandates, internal and external. In doing so it is following the strategy set out by Casal of focusing on just five UK cities or regions: Manchester, Birmingham, London, Cambridge and the Thames Valley.
By reducing its target markets in the UK it hopes to utilise better local knowledge, simplify management of the portfolio and also undertake larger deals that dominate those areas, with its backing of Allied London’s £300m Enterprise City in Manchester (below) being the prime example Versey and Skinner point to.
“We are looking at knowledge-driven economies, and that will be across Europe too – the likes of Paris, Berlin, Munich, Frankfurt and in northern Europe the likes of Copenhagen, potentially Stockholm and Amsterdam. These are pockets of economic vibrancy that we see, not necessarily delivering outperformance year-on-year at a market level, but not subject to the locational obsolescence you may get in a second-tier market. The real outperformance comes from being very focused on those markets and concentrating your presence there,” says Skinner.
As a result of the focused strategy, the company has sold around 500 assets since 2016, including £1.5bn of retail property.
“We have been ahead of the curve in seeing some of the challenges that faced the retail sector and the structural oversupply issues. Even assets that you might think of being in high demand, such as industrial, if they were not really in our location and business plan, if they are mature we have been disciplined in selling out of those areas to focus on where we do want to be,” says Skinner.
Brexit may have slowed deployment into the UK market by Aviva, with clients more likely to have been asking them to pile in without the political chaos, but the firm is confident there will be a multitude of opportunities once the background noise quietens down.
“There are areas of the market in which if we had a soft Brexit there would be good buying opportunities. There will always be good buying opportunities in a market where we are focused and where we have an information advantage and can exploit value. That applies from the core end of the spectrum, from long lease to development and major refurbishment. Those markets are expected to remain robust from an occupier perspective. A hard Brexit or a ‘bad’ Brexit, where there is a significant impact on GDP, that could be different,” Skinner adds.
Aviva may be something of an oil tanker, but with a new skipper at the wheel it is slowly changing direction and, if the choppy waters of Brexit are navigated successfully, its concentrated geographical UK strategy may start to look ahead of the curve.
Daily traded, open-ended funds – fundamentally flawed or simply responding to demand?
Aviva is one of a number of UK institutions that manages an open-ended, daily traded property fund for retail investors. These types of funds have been heavily criticised for providing a false sense of liquidity to investors, with the real estate they hold being fundamentally illiquid, unlike equities.
In the wake of the EU referendum the funds were subject to large redemptions that saw them either fire-sale assets, gate their funds, or put a “fair value” discount on the price at which investors could withdraw.
Aviva chose to gate its UK Property Fund, which now stands at only £800m, compared with £1.5bn before the suspension in 2016. It has delivered cumulative returns across 2017 and 2018 of 12.7%.
Versey maintains there is still “a place for these vehicles in terms of providing retail investors with a diversified exposure to the investable universe”. It targets 10% to 15% cash levels in the fund to be able to pay redemptions and is now at 13%, “towards the top end of that range”, despite the inevitable cash drag on returns, “at a level appropriate in the context of current market conditions”.
He says: “I have been on a government-led working group as part of a patient capital review to help look at improving access to this space for customers but at the same time protecting their interests. It is not straightforward. Can you create a vehicle where gating is a feature and is actually discussed and put upfront? ‘This is what we will do in the event of stress…’
“The retail funds are the hardest of all for the government. You have to protect the customer but they don’t necessarily know what is being marketed at them. No one wants that. Gating is not a feature where doing it should hurt your reputation. Gating looks like a success as those that remained in the funds and gated did not experience a fire sale.”
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