In less than five years, Aviva Investors has divested approximately 600 assets from a portfolio of around 1,000 properties. The sales are part of a portfolio transitioning strategy aimed at seeing the investment arm of UK insurer Aviva manage only properties it feels will be resilient to turbulent times.
Responsible for managing the process is real assets chief investment officer Daniel McHugh. He became the second person to occupy the role in July, three years after its creation. His promotion followed the insurer’s first real assets CIO Mark Versey’s elevation to chief executive of the business.
McHugh inherits a strategy that is almost complete. “We’ll never be 100 percent there,” he tells affiliate title PERE in his first interview since being promoted. “But we’re more or less there in terms of a steady state for a portfolio on a normalised level in terms of churn or reinvestment rate.”
Aviva Investors has come a long way. Indeed, at PERE’s UK Roundtable in 2018, former global head of research and strategy David Skinner said the insurer was selling approximately £2 billion (€2.32 billion) of assets per year in a bid to concentrate the portfolio in cities where people want to live, play, work and learn.
McHugh says that rate has now been reduced to less than £500 million on an annual basis: “We’ve gone from 1,000 assets to sub-400. We divested 600 and reinvested a large bulk of that capital into larger assets in concentrated locations.”
But just as Aviva’s strategy has become largely executed, the pandemic has hit and thrown offices – the main exposure across its real estate equity and debt investments – into the spotlight as arguably the most uncertain institutional property type nowadays. With new working patterns among many office occupiers and increasing volumes of assets facing environmental or social impact accreditation issues, office landlords around the world are facing unprecedented levels of work to keep their properties relevant.
Offices account for 34 percent of the equity invested across Aviva Investors’ UK portfolio and its European long-income fund, and 29 percent of its exposure in these markets when real estate debt is added.
Regardless of this major exposure, McHugh is confident Aviva’s pivoting strategy to concentrate on major cities will see one of the UK’s biggest office landlords navigate this unstable time for the sector. “Yes, we’ve seen a number of themes emerging that could be badged as threats to the office,” he says. “But there are also opportunities as well. Our research and data saw us reorientate our portfolio to concentration on specific locations.”
Aviva’s current holdings are clustered in London, Manchester, Birmingham, Cambridge and selected parts of the Thames Valley area – places where the firm sees a prevalence of sectors that should thrive in the “knowledge economy”. These include life sciences, digital tech, financial services and various forms of media businesses. Conversely, Aviva has jettisoned assets accommodating work that could become automated, such as various back-office and administration providers.
When asked whether such an emphasis on office assets nonetheless represents a concentration risk for the investor, or whether a greater focus on the currently more popular property types of logistics, residential or digital real estate would make more sense, McHugh replies: “We’re not sitting here today with a pressure or necessity to tilt the portfolio.” Indeed, he says the remaining 40 percent of Aviva’s real estate assets are logistics in the UK and elsewhere in Europe and master-planned residential land in the UK. On logistics, he says: “We’d like to do more, but again selectively. We’re not reorientating the portfolio.”
Understandably, performance will play an instrumental role in determining strategy and, during the pandemic thus far, Aviva’s various return targets are meeting expectations, McHugh says. The insurer runs an absolute return strategy expected to produce high single-digit returns on a levered basis over a rolling five-year period; a liability-matching long cashflow strategy expected to offer 200-300 basis points more than the UK’s risk-free rate; and blended strategies offering both. McHugh says: “Our funds [for the most part] are performing well for those outcomes.”
Key to that has been sustained occupancy levels during the crisis, with most of Aviva’s stabilised portfolio at above 90 percent occupied. McHugh is alive to the notion that ending forbearance in terms of eviction moratoriums and other protections for tenants could prove challenging to landlords. But he says Aviva’s mechanisms for dealing with items such as defaults, enacted when the crisis began, have kept major trouble away from its assets under management.
Looking ahead, expect to see Aviva’s investment run rate improve. McHugh predicts more than £5 billion of investments per year in the UK and the rest of Europe from the real assets business, approximately half of which will be in real estate equity and debt outlays. After spending half a decade pivoting a portfolio into strategic clusters, this investor is ready to kick on.