The manager of the group’s £1.5bn Property Trust said an influx of cash from various types of investors has led the fund to carry almost 15 per cent in cash and more than 5 per cent in property equities.
This is higher than the usual fund target of between 10 per cent and 15 per cent in cash and liquid assets, but Mr Nell said he was looking to lower the cash weighting with his current offers.
The manager of the direct property fund said he now had “three deals under offer” and “offers out on another couple [of properties]”.
The three deals under offer would take between £60m and £70m out of the cash weighting and Mr Nell said he was looking for further properties on top of that.
His bullishness on the property market for this year and into 2015 has led him to target bringing the combined weighting in cash and liquid assets to below 10 per cent to take advantage of the rental and capital growth on offer in the market.
The manager said the fact he has been able to make offers on properties marked a stepchange in the market.
He explained that in the first quarter of 2014, property managers had held on to their assets rather than sell them, because they were “frightened that they could not recycle profits”. This became a self-fulfilling prophecy when no one was willing to sell.
However, Mr Nell reported that the situation had changed with more deals currently on the market, saying he has “definitely seen more opportunities in the market in the past three months”.
He added that the large amount of transactions had raised the potential problem of oversupply, but that the scale of demand from across the investment spectrum should calm any such concerns.
“We have had positive flows for a good while and I can see this continuing,” he said.
“There have been some institutional investors upping their weighting to the asset class. There is money coming from every type of investor: retail, institutional and even banks.”
In spite of Mr Nell’s bullishness, he did raise a cautionary flag about the outlook for the asset class in 2016 and beyond, when he thinks rising interest rates may cause a spate of outflows, particularly from investors only drawn in by the premium yield on offer above gilts, high-quality bonds or cash.
He said the assets particularly vulnerable to outflows, and a possible market correction, would be central London properties, and the type of long-dated low-yield, low-volatility assets currently being favoured by annuity funds.
He said these assets would be “prone to decline when bond yields rise”, but that they were the only areas with a “material risk in pricing terms” within the asset class.
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F10 - pic of Philip Nell in folder.
Philip Nell is continuing his foray into residential property, in spite of the pick-up in deal activity in his main commercial property space.
The manager said residential property within the Aviva Investors Property Trust would always be an “ancillary” asset and there would not be a “sea change in the way the fund is run”.
He said there is only ever likely to be “around 5 per cent” of the fund’s assets invested in conventional privately rented residential property, with a few per cent more in student accommodation, where rental yields move differently from private rental.
Mr Nell said the firm is currently “underway” with its first privately rented acquisition and is still making progress with a deal to acquire a batch of student housing, which he said had been held up by “a few issues”.
In spite of playing down its weighting in the fund, Mr Nell said the money placed into residential property represented a “perceptible change” to the strategy, particularly for the “diversification” benefits of the new sector.
The residential property market is under-represented within UK retail funds, with only small funds from the likes of Hearthstone available for investors.
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Up arrow – 14.8%
Down arrow – -2.7%
In the two years to the end of May 2013, the Aviva fund lost 2.7 per cent, but it has gained 14.8 per cent in the past year.
