ANALYSIS: UK insurers poised to pump ‘billions’ into real estate

UK insurers are changing tack. With UK Treasury rates falling to just 2.34% in August, some canny insurers are poised to pump billions into real estate instead in search of better returns.

One insurer with billions to spend is M&G Real Estate, part of the investment arm of insurer Prudential. In the past six months alone, it has invested £1.7 bn (€2.14 bn) in real estate, according to Chris Perkins, head of UK investment management.

‘Last year, we invested £2.5 bn globally. This year we plan to exceed that. We’ve got billions to invest if we can find the right opportunities,’ he said.

Primarily, M&G is targeting core and core plus deals in markets such as the UK, Germany, France, the Nordics and Benelux countries, according to Perkins. M&G invests in offices, retail, logistics and residential and is even open to development, especially in the residential sector, he said. ‘Our remit has changed, though. We’ve been holding on in Europe and not selling. In the past, we typically had less than 10% gearing – we’ve now increased this slightly,’ he said.

In June, M&G Real Estate acquired lender RBS’s 4,645 m2 offices at Manchester’s Spinningfields for around £320 mln. M&G’s competitors AXA and Aviva are also believed to have put in a bid. The two offices are fully leased to RBS for 23 years and are subject to annual fixed uplifts of around 3%.
Today, M&G’s real estate arm holds £19.3 bn of AUM across its direct real estate holdings and fund vehicles, of which around 80% is in the UK, with the remaining 20% split broadly equally between continental Europe, the US and Asia.

Interestingly, M&G is allocating more to real estate than many insurers. Its Life fund, for example, allocates between 10% and 12% to real estate, compared to an industry-wide average of between 5% and 7%. ‘Our Life fund has a lot of firepower. Some of our retail funds are seeing inflows of £5 mln to £6 mln a day,’ Perkins added.

Also keen to boost its real estate holdings, particularly in the UK, is insurer Legal & General. So far this year, it has invested just over £1.75 bn in the UK real estate market. In March, it acquired a portfolio of 55 assets backed by RBS from Telereal Trillium for £550 mln. The deal represented a rare opportunity to acquire RBS’s flagship buildings, with a portfolio let to RBS on lease terms predominantly over 23 years with RPI linked reviews, representing a net initial yield of 5%.

Last year, LGP invested £2 bn in the UK market. The overall group manages £48.2 bn of assets.

‘AGGRESSIVELY' SCALING UP INVESTMENT IN ALTERNATIVE ASSETS
While L&G doesn’t have target allocations, it plans to increase its direct investments, which includes property, according to Robin Martin, director and head of research at Legal & General Property. His firm is looking at both London and the regions, across all asset classes, but is not looking at continental Europe – yet. In particular, Legal & General Property is ‘aggressively scaling up’ its exposure to alternative real estate, including senior housing and student accommodation. Part of the attraction is that such assets are ‘a good match for a company looking for long-term income to investment grade covenants, including sale-and-leaseback deals’, according to Martin.

‘We’ve spent a lot of time looking at retirement housing. It’s very well developed in the US but still very embryonic in the UK. We think it’s very exciting as an asset class and want to invest more in it. However, given that we’re talking about a product that barely exists in the UK, we are also looking at development, potentially with a partner,’ Martin said.

SPAIN AND IRELAND BACK IN THE SPOTLIGHT
Other insurers are turning to markets that are enjoying a cyclical upswing, notably Spain and Ireland. Aviva is keen to invest more in both markets, according to Chris Urwin, global real estate research manager at Aviva.

‘We are looking at Spain more seriously now than we were a couple of years ago. It’s not easy to find good value but there is a cyclical upturn. We also renewed our interest in the Irish market last year because we saw that the recovery was imminent,’ Urwin said.

In addition, a big area of growth for Aviva is the secured income asset side, such as infrastructure and long-term assets. ‘Some of our funds target very secure leases, which are popular with pension funds because they’re a good match for their liabilities, ‘Urwin said. ‘It’s about the quality of the income stream and the tenant. Infrastructure is quite broad but, for us, it includes social housing and car parks,’ he added.

Aviva had £21.92 bn of European real estate AUM as of 30 June 2014. Around 10% of its portfolio is invested in real estate. ‘We definitely want to increase that. We’ve identified it as an area of growth,’ Urwin said.

While Aviva has a broad investment reach, Urwin acknowledges that a recent slew of disappointing economic data in Europe has put a slight dampener on the market. ‘It’s a tricky time in Europe. We started last year feeling positive and thought about taking on more risk but the economic data has started to disappoint once more. However, there’s still value to be found in core markets, such as core offices in Germany and France,’ he said.

One fund that will boost Aviva’s real estate holdings is its recently launched Aviva Investors Multi-Strategy Target Return Fund which, as the name implies, has a remit to invest in a wide range of asset classes, including real estate and equities. The fund, which was launched in July, aims to provide annual returns of 5% above the Bank of England base rate before charges over a rolling three-year period, irrespective of whether markets rise or fall.

‘There will be other funds to follow,’ said Urwin. ‘The portfolios are designed to generate good returns in all conditions and to offer protection during a downturn. Further incarnations of this fund will include matching liabilities, inflation protection and real estate will make a larger contribution to that,’ he said.

Standard Life Investments is also hoping to take advantage of the cyclical upswing in Spain and Ireland, according to Mark Meiklejon, the company's investment director of real estate. ‘We’d like to invest more in core European markets as well as core assets in southern Europe, including core central Madrid and Dublin’s CBD. Some funds are covenant and income focused, which could include investing in alternative assets such as student accommodation,’ he said.

Meiklejon also believes that allocations to real estate are going to increase in the industry, although they’re unlikely to find their way back to the allocations of 20% in the 1970s any time soon. ‘I think 10% to 15% would be eminently possible, although regulation can make it tough. We still see a lot of opportunities in the real estate sector,’ he said.

Asset classes have also evolved a lot in the past few years, according to Meiklejon. ‘We don’t buy in emerging markets, such as Russia, so much. However, we do invest in Poland and the Czech Republic, as well as Germany, Benelux countries and Scandinavia.’

Of Standard Life Investments’ £14 bn of real estate AUM, two-thirds is in the UK, £2 bn in global securities, 6% to 7% in North America and 7% in continental Europe, via an eclectic mix of funds with very different risk-return profiles.

Sara Seddon Kilbinger
Correspondent German-speaking countries & UK