In July, BlackRock became the latest manager to set up an institutional long-lease fund when it launched the UK Long Lease Property Fund with £250m of initial capital from six pension fund clients. BlackRock had invested in long-leased assets, such as supermarkets and offices, for 10 years through its £2.4bn UK balanced fund, but this was the first fund focused in this area of investments and the first launch by the property business for seven years.
The fund targets a 5% distribution yield with monthly income distributions. Manager Geoffrey Shaw, who was poached from Aviva’s long-income Lime Property Fund in the summer, has invested almost £200m of the equity in hotels, student accommodation and car parks, as well as more traditional offices and retail. The debut investment was a portfolio of assets bought for about 100m from private investor Aubrey Weis. for many years to come and real estate is a way to get hold of that. Some people have concerns about credit and property is a real asset, where even if the credit goes bad, you still have the real estate. So I don’t see the money that’s coming in drying up.
“But as returns start to increase, I do see a desire for higher-risk-style assets as investors start to want to take on more risk. If a pension fund is already fully allocated to real estate, it may well switch money from core, long-dated income into higher-risk property. Five years ago there was a lot of trauma in the market for pension funds and other investors, and people wanted to reduce risk. The market is obviously opening up now and I can see more money flowing into value-added and opportunistic property – that’s the reason why BlackRock merged with MGPA this year.”
BlackRock bought European and Asian private equity real estate manager MGPA in September, doubling its real estate assets under management to $25bn. That represents around a quarter of all its alternative assets under management. So for the core, long-income funds, a lot depends on whether pension funds are already fully allocated – and BlackRock’s experience is that they are not. The fund will be capital raising again in Q1 2014. “We don’t think there are many that have invested all their allocation into long-dated real estate” he says. “There is more capital than there are opportunities – it’s not a case of long-dated losing out and higher-risk assets winning.”