RREEF's fund launch comes at 'challenging' time for sector

RREEF's plan to launch a £1bn (EUR 1.3 bn) UK property fund targeting 'index-linked returns' before the year-end comes at a challenging time for both the sector and the UK.

With UK property in the doldrums and funds across Europe struggling to raise capital, launching a new fund will be no mean feat. 'There haven't been any major property fund launches in the UK this year,' John Danes, director of property research at Aberdeen Asset Management in London, told PropertyEU. 'Most funds, whether in the UK or elsewhere in Europe, are struggling to raise capital,' he said.

In addition, UK property has not performed strongly this year. According to CBRE's UK monthly index report, published earlier this month, UK commercial property performance has been muted this year, with total returns of just 0.8%. Capital values have fallen by 2.6% this year, with offices seeing the best and worst regional performance. According to Danes, property rental growth across offices, retail and industrial property in the UK has been flat this year, compared with growth of around 5% last year.

Index-linked funds, with their long-income and security, are likely to appeal to pension funds which are still keen on income from property, said Danes. 'However, the covenant strength is very important - if it’s weak, that’s a huge risk,' he warned.

Nevertheless, the long-income sector was struck a blow this month in the UK when budget hotel chain Travelodge was taken over by its creditors, including Goldman Sachs, and two New York hedge funds as part of a deal aimed at sparing the hotel chain from formal administration.

As part of the deal, the creditors have agreed to write off £235 mln in bank debt and to cancel a £482 mln eurobond. As a result of the deal, Travelodge - which is struggling with £635 mln of debt as well as an additional £100 mln in annual interest payments - will be able to slash its debt to less than £330 mln.

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