How To Reinvent A £25B Real Estate Juggernaut

UK fund management giant Aviva Investors is looking to double its real assets business over the next two to three years, which would see its real estate holdings grow from about £25B to £50B — and it is overhauling the way it invests in property to do that. 

The strategic shift being undertaken by Aviva Investors gives insight into how large real estate owners with big portfolios are attempting to meet the challenges of a world where people are using buildings differently, and where money needs to be found to reinvest in assets that might have been owned for several generations. 

Aviva Investors is looking to move away from funds that just perform in line with the wider market or from owning a little bit of lots of asset classes to provide diversification, Head of Real Asset Global Investment Specialists Mark Meiklejon told Bisnow. It will look to make bigger bets on the asset classes and locations it thinks will outperform.

The fund management division of insurance company Aviva is also looking to bring in new investors to buy stakes in assets it already owns, which would free up capital to reinvest in the buildings and make them more sustainable and fit for a new world of, in particular, work. 

“That traditional way of running balanced funds, where you have to have retail parks, for instance, because you need to match an index, that’s not the business model today,” Meiklejon said. 

About half of Aviva’s real estate assets under management is in real estate debt, the other half in real estate equity. It manages investments both for its parent insurance company and outside third-party investors. 

The parent insurance company will continue to put more money into real estate, Meiklejon said, and will mainly do so by providing more real estate debt, because the Solvency II rules that govern how insurance companies quantify how risky their investments are make providing loans more attractive than buying buildings outright. 

Meiklejon said that on the equity investment side, it is looking to grow its commingled funds business following a recent strategic overhaul and to bring more third-party investors into big one-off deals. 

The manager has shut down several commingled funds that were too small and where the portfolio did not reflect the sectors where it saw the best growth prospects.

In future, it will raise and invest funds that have diversification in terms of different assets and tenants, but which fit themes where Aviva has conviction. An example would be its investment in a UK single-family rental platform, where it will back developer Packaged Living to the tune of £200M to create a portfolio of 1,000 affordable and sustainable new single-family homes. The investment is coming from Aviva commingled funds. 

“There is a chronic shortage of new, quality, affordable family housing,” he said. “It’s a sector that might not be in the MSCI index, but we are not shaping our funds according to a benchmark.”

Energy efficiency is another thing Aviva feels confident investing in with its commingled funds — its Climate Transition Real Assets Fund has £1B to invest in real estate and infrastructure assets where carbon emissions can be reduced and the assets made net zero. As well as buying buildings, it is buying up land and planting new forests, so that the fund does not have to buy carbon offsets — it is creating its own, Meiklejon said.

That fund recently bought an office building housed in a Victorian former warehouse in the Hoxton area of east London. Curtain House will provide 41K SF of office space, and the retrofit will take the energy performance certificate measurement of energy efficiency from a grade E to a grade A. 

Aviva announced Monday that it has teamed up with Japanese investor Obayashi Corp. to buy the 50% the duo did not already own of the 313K SF 20 Gracechurch Street office and retail building in the City of London. The deal, an example of Aviva’s strategy to bring in new outside capital for properties and development schemes in its pipeline, values the building at £430M, and it will now undergo a refurbishment.

There is more to come from this joint venture, it would seem.

“We believe we will be able to develop a compelling portfolio of assets and have every confidence that our partnership will provide us with access to attractive opportunities in the coming years,” Jiro Otsuka, Obayashi senior managing executive officer and head of its real estate development division, said in a statement.

Other examples of beefing up outside investment include Aviva bringing in Allianz to build two offices in the City of London at 1 Liverpool Street and 101 Moorgate, which will have an estimated cost of £500M, and bringing in Canadian investor PSP to put £250M into its CB1 office estate in Cambridge. 

“The challenge for the parent company was how to invest new net capital in existing assets,” Meiklejon said of the Gracechurch Street deal. “What we are able to do more of is to bring in capital to provide [capital expenditures] for repositioning. You could see the asset because it needs to be upgraded, but rather than selling at below what we think is the underlying value, we’re bringing in capital to create an asset that is best in class.”