UK - European institutional investors that have committed to Legal & General Property's (LGP) new UK core fund have been given a choice over the level of gearing they will be exposed to.

LGP has announced the first close of its UK Property Income Fund, raising £175m (€200m) from European institutions for the vehicle , which will aim acquire real estate with strong and stable income streams.

Investors in the fund can choose between geared and ungeared subscriptions, which LGP said allows them to select their optimal appetite for risk.

The variable debt structure enables the fund to target returns of 15% for those seeking geared exposures and returns of 10% for those seeking a more risk-averse, ungeared exposure.

"Targeted predominantly at a new pool of investors for LGP, based across Europe, we believe that this innovative gearing structure will enable the fund to attract a wide variety of investors who are united in their demand for access to long-term value within the UK real estate market," said Michael Barrie, director of balanced funds at LGP.

LGP has also sought to strengthen the alignment of interest between the fund's management and its underlying investors by introducing a number of private equity-style measures.

These include co-investments from management team members and performance fees that are payable on the fund's expiry, subject to reaching a predetermined hurdle rate.

LGP said a proportion of the performance fee would go to the individuals working on the fund, "offering greater alignment of interest and incentivisation".

Barrie added: "The fund has been established with the intention to be best in class, not only in terms of performance but also in targeting the highest standards of corporate governance, consistent across all LGP funds, as well as ensuring the fund managers' interests are acutely aligned with those of the investors."

LGP's fundraising target for the first half of 2010 is a gross asset value (GAV) of £500m, but the fund manager hopes to raise up to a GAV of £1bn through a series of closings.

The fund will target large lot sizes, between £50m and £100m, in the UK office, retail and industrial sectors; a strategy that is likely to be more successful with a large pool of investable capital.

The lot size range is in contrast to a number of fund managers who have raised UK funds in recent weeks focusing on the opposite end of the size spectrum, targeting assets below £10m where bidding is less competitive.

Charlie Walker, senior fund manager for the UK Property Income Fund said the level of investor interest and the £175m commitment so far was "a strong endorsement" of the strategy to focus on "a relatively untapped area of the market".

He said:     "The larger lot size takes the fund's buying requirement beyond much of the current institutional zone, accessing an illiquidity premium clearly evident in today's market.

"We are in advanced discussions over a number of assets and a wide variety of vendors, with a view to building the portfolio to £1bn over the next two years," he added.