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Aviva expert outlines property investment risk options

Aviva expert outlines property investment risk options

Aviva Investors has outlined three major risk levels for property investing, as the asset class continues to attract attention at a time when the case for fixed income is being questioned.

Speaking at an event this morning (11 June) hosted by the Personal Finance Society, the firm’s head of European retail funds Philip Nell said these direct property risk types were ‘core’, ‘core plus’ or ‘value add’, and ‘opportunistic’.

Speaking about the core class, he said these are very low-risk assets, generally long-dated income streams, for long duration leases often with rents linked to inflation, or some sort of fixed increase in certainty of rental raise.

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“These assets require relatively low levels of asset management property as a resource intensive asset class,” Mr Nell explained, suggesting that they will probably yield a lower market return, but with much less market risk.

“Most funds have a balance of these types of investment, some funds dedicate entirely to these. We have annuity funds that only buy core assets but most funds would have a balance of these and its just deciding what that balance is.”

The next property risk type, described as core plus or value add, is a “really run of the mill” institutional property asset and a “broad church”, so sometimes they quite liquid.

Finally, the opportunistic property risk type generally requires material capital investment and often suffers from relatively low liquidity during initial delivery. Mr Nell said that therefore this means high levels of resource and active management.

In terms of risk appetite, investors need to consider whether they are willing to bear the risk that comes with gearing in funds. Mr Nell also noted the tax position of the investor and vehicle or asset, suggesting people should be raising questions of whether or not they are aligned with their investments.

Next up on the list of key considerations was the diversification of the investment itself and the correlation of performance to other holdings. “It is understanding whether the diversification is just at investment level or whether its at your portfolio level as well,” he added.

Mr Nell also pointed out the importance of currency in the commercial property investing arena, which he said was relevant if you are investing outside the domestic market, adding that UK listed companies do not hold overseas properties.

“We all thought the Euro a few years ago was pretty stable, but obviously it hasn’t been of late, so make sure that your liabilities are again understood and matched.

“In currency terms not all property funds have currency hedging in them, it’s very expensive because you can’t match it out very quickly, so I would be aware of that and bear that in mind.”

ruth.gillbe@ft.com