Aviva’s Nell backs residential property

Aviva Investors’ property star Philip Nell is planning a significant move into residential property in his £1.5bn Aviva Investors Property Trust.

The fund, which was the first open-ended property fund when it was launched in 1991 by Norwich Union, has traditionally had a strong focus on commercial property.

But Mr Nell said the investable market for commercial property is very small, with huge numbers of investors fighting over each new property that comes onto the market.

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The manager said Aviva Investors as a house is looking to expand its presence in the residential property marketplace, and he is increasingly looking for such opportunities in his fund. He currently has an offer in place for a student housing lot which he said would be able to generate 13 years of consistent income.

Mr Nell is focusing particularly on student housing and the “core private rental” residential market. “Over the next year or two, I would be hoping to make more purchases in that area,” he said.

Rather than looking to buy houses on the secondary market, Mr Nell said he will look to access “new-build”, particularly “large blocks where the fixed costs are very low”.

The move into residential property comes after Mr Nell warned that demand is far outstripping supply in the commercial property sector.

He said property managers are holding on to assets rather than selling them at the right time, simply because they do not believe they can reinvest the money in the current environment.

The demand for property has increased in the past year as the demand from investors to get access to the asset class has also increased.

Mr Nell said: “There is an enormous amount of money chasing not a lot of products. Everyone is nervous about selling assets, as the prospects of reinvestment are not very high.

“Banks are even bringing poor secondary and even tertiary properties onto the market, but they are struggling. As such, investors are being very aggressive on the deals coming to market.”

The manager said that most investors buying up commercial property assets on the market are “pricing in all the upside risk and paying for it up front”, which means the property must deliver returns perfectly throughout its life to justify the price paid.

In spite of his warnings about the cost of property at the moment, Mr Nell said he thinks the increasing interest in the asset class from investors will see returns continue to be strong in 2014.

He said: “Investors are starting to come back pretty strongly, so property remains well placed with momentum, especially with the Bank of England saying [rates] will remain low.”

Mr Nell predicted that the average return on direct property in 2014 will be around 15 or 16 per cent, from a combination of income and capital growth.