The spate of long-income REIT listings and their failure to raise the expected levels of capital has not deterred Aviva from launching its own Secure Income REIT.
The fund manager aims to raise £200m for the REIT, which will target assets with strong occupier covenants and leases of more than 10 years.
Its first purchase will be a portfolio of four properties for £85m.
Renos Booth, head of real estate long income at Aviva Investors, who will be managing the new REIT, says that a focus on tenant covenants rather than lease length would be its USP.
“Our differentiating factor is we that would rather ensure we have a low probability of default with our investments,” he says. “We want to get that extra bit of yield through a slightly shorter [lease] duration.
“There is no point paying a keener yield to buy longer-duration income if there is a risk that tenant may not be there at the end of the term.”
Late to the table
Nine REITs have launched so far in 2017, almost all targeting long or secure income, whether through commercial, residential or alternative investment strategies.
A number of these have failed to reach their stated targets, and these failures have been attributed to investor fatigue or scepticism.
AEW’s UK Long Lease REIT raised 54% of its target, while LXI REIT pulled in 69%.
“I would like to think that maybe part of the reason they have not succeeded in getting their full raise is the knowledge that we might be coming out there,” says Booth.
“We have obviously been having discussions with potential investors for some time now, and we like to believe that may be the case.”
Booth says the fact that a portfolio of only £85m was lined up was not an admission that it would fail to make its targeted raise.
“We have got to manage the process as well. There will have been opportunities that we would have been able to access that, maybe due to timing, would not have fitted,” he says.
“We were not able to say anything about the messaging of this proposition, because of the sensitivities around listing rules, so we have not been actively going out there to source the product at the moment.”
He says that all £200m of capital should be deployed within nine months.
Strength of the name
Aviva will also be relying on the strength of its name to help with the raise and to differentiate it from the plethora of other vehicles. It is committing just under 20% of the gross issue proceeds.
Booth points out that his firm was one of the first into the sector when it launched its long-income fund in 2004, and adds that AEW has traded more than £2bn in assets over the past five years. It currently has £4bn of long-income property under management.
“We are confident we can access this product continually going forward, but we have to time it appropriately as well,” he says. “We have got a track record in this space that shows if you buy strong-quality credit and real estate in a downturn, it provides you with greater capital stability.”
The REIT’s new board will be led by chairman Andrew Cunningham, the former chief executive of Grainger; Suzanne Avery, formerly Royal Bank of Scotland’s managing director; Steffan Francis, previously of M&G Real Estate; and Marlene Wood, previously of Miller Developments.
Booth says that new assets will be bought from various sources, with one or two possibly from other Aviva funds.
“We are not buying any from the existing long-income fund,” he says. “There may be one or two assets that may come from the wider Aviva business, because that side of the business, the UK direct space, has gone through a strategic review as well.”
Aviva has been a net seller in the UK and is focusing on “place making” opportunities.
Despite the competition, Booth says he is confident about Aviva’s new REIT.
“We would not be launching this product if we did not believe there was the potential to expand this product as well,” he says.
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