Aviva Investors, the global asset management business of UK insurer Aviva with around €50 bn of real assets, is moving up the risk curve away from core plus and further into alternatives such as fibre, peatland, and single family residential for rent.
In his first interview with PropertyEU since becoming CIO of Real Assets 18 months ago, Daniel McHugh explained historically managers such as Aviva Investors almost exclusively stuck to core, unlevered, ‘safe and steady’ investing.
But more recently, investors expected to be compensated for risk. He said: ‘That means, we think our strategies need to be higher returning. I think our risk profile is a little more than core plus towards value add territory now. Moving forward, we are keen to build longer-term high-quality portfolios that take advantage of thematic opportunities we see in the market. We are very much keen on doubling down on that.’
This approach includes taking development risk such as in Cambridge, UK, where Aviva Investors is developing five offices alongside co-investor Public Sector Pension Investment Board of Canada (PSP Investments) in a city deprived of quality office stock.
The value added approach and further move into alternatives extends to Continental Europe where it expects to deploy approximately €750 mln this year in selective markets.
The firm currently owns investments in Denmark, Sweden, the Netherlands, Germany, and Spain made out of its Paris headquarters. Though parent Aviva plc sold its French business for €3.2 bn in 2021, McHugh says the real assets group continues to be focused on Continental Europe from Paris on behalf of its pan European funds. Assets currently stand at between €6 and €7 bn on the Continent.
In an example of a higher risk, higher returning strategy, Aviva Investors exited mixed use building, Galleri K, in Copenhagen, for €250 mln in May. That has delivered an IRR of around 16% after Aviva Investors originally took on the building with a 30% vacancy risk. PSP Investments partnered Aviva for the investment.
Aviva Investors’ 220-strong real assets group manages assets stretching across real estate debt & equity, long income, infrastructure debt & equity, corporate debt & structured finance, and more recently, “nature-based solutions”.
In 2021, it launched the Aviva Investors Climate Transition Real Assets Fund mostly targeted at Defined Contribution (DC) pension schemes. The fund aims to accelerate or benefit from the transition to a low carbon economy and was seeded by £425 mln of investor equity giving the fund £1 bn of firepower. It sits in line with Aviva plc’s pledge to achieve net zero by 2040 or earlier.
The first investment made for the fund was Curtain House, an office block in central north London due for significant refurbishment.
But the fund has also struck one of the biggest forestry and land deals in the UK. In December, it teamed up with Par Equity to acquire Glen Dye Moor in northeast Scotland for a woodland and peatland restoration project aimed at capturing over 1.4 mln tonnes of carbon. The investment was made on behalf of the Climate Transition Real Assets Fund by the nature-based solutions team. ‘What’s really interesting is that the peat captures close to, if not more carbon than will be managed from tree planting,’ said McHugh.
McHugh also revealed the company’s nature-based solutions team was looking further afield for further forestry and peatland investments. ‘We can see this expanding to be pan European and possibly global.’
Fibre and SFR
Meanwhile, Aviva Investors’ real assets group wants to make further investments in alternative sectors such as fibre telecommunications, and single family residential for rent in the UK and across Europe.
In April, the firm agreed to provide up to another £100 mln of funding to southeast England rural full-fibre specialist, County Broadband, on top of an original £46 mln made in 2018. It has a similar deal agreed with southwest England full fibre provider, Truespeed.
Last November, it partnered with Packaged Living, a specialist build-to-rent single family platform in the UK.
McHugh was appointed CIO of real assets in February 2021 following the elevation of Mark Versey to CEO of Aviva Investors. The real assets division has been streamlined from around 300 to 220, but the company’s plan is to continue growing assets.
He said headwinds were affecting the investment industry as a whole as rising inflation had led to increased interest rates, which in turn had doubled the cost of borrowing – something he has seen reflected in prices.
With the ESG focus of investing, he said obsolescence of assets and cap ex required was one of the biggest issues to be faced. ‘Our asset managers are almost “engineers” as much as asset managers. We spend more time thinking about transition plans and capex treatment for buildings as opposed to rent reviews and, the traditional things that asset management teams used to do a lot more of, and I think that is exciting.’
In May this year, the firm’s real estate debt team surpassed the €1 bn mark of sustainable transition loans.
Speaking of the mission across the whole group, McHugh concluded: ‘My Number One priority remains investment performance.’