GLOBAL - F&C REIT Asset Management has launched its first fund, an opportunistic institutional vehicle targeting distressed situations in the UK and with an internal rate of return (IRR) of more than 20%.

The company, which resulted from the merger between F&C's property arm and Leo Noé's REIT Asset Management last year, was the successful buyer of Dawnay Day's UK property portfolio in March and hopes to source similar deals for its new Devonshire UK Opportunities Fund.

To achieve returns of over 20%, the fund has the flexibility to gear up to 75% once more aggressive financing becomes available, and Nick Criticos, chief executive at F&C REIT, is confident this will happen during its seven-year lifetime.

"At some point in the cycle we know you will be able to refinance back up to 75%. We do want the flexibility within the structure of the fund to enable us to do that," he said.

Criticos said the fund had not had any "push back" from prospective investors, despite indications at INREV's annual conference in April that many institutional investors, including Danish pension fund giant ATP, have less of an appetite for gearing going forward.

Speaking to IPE Real Estate more recently, Allan Mikkelsen, partner at ATP Real Estate, said: "Debt has done quite a lot of harm now in these down markets and we see managers spending a lot of time on managing debt instead of managing real estate."

Mikkelsen said he would encourage a rough benchmark of 30% leverage for core/core-plus funds, and an overall average level of 50% across the risk spectrum.

He said if presented with a fund that had the flexibility to take on 75% leverage, ATP Real Estate would want to have some form of control which required the manager to consult with investors before making the decision.

Criticos said to achieve returns of more than 20% with a more modest level of leverage would be difficult.

"You've got to have a sensible level of gearing," he said. "If you geared it at 65% rather than 75%, you have to work the property that much harder to return an IRR on the equity.

"We haven't had any push back from the people we've presented to so far. Not that long ago, those same investors were taking 80%, 90% gearing on properties," he added.

"People overreact on the upside and on the downside, and I think there needs to be some sensible middle way."

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