Why You Should Save Some Cash for U.K. Property Opportunities

The $48B real estate investment manager talks about the U.K. property market landscape post-Brexit, and why investors should embrace the secondaries market

Aviva Investors is taking some of its capital “off the table” in the U.K. as it prepares for the next wave of opportunities.

Alistair Dryer, senior portfolio manager at the $48B real estate investment manager, says the insurance company had been underwriting a slowdown in U.K. property markets since the beginning of 2016 and that it was now an “attractive moment in time” to be holding some cash “because we think there will be opportunities” in the foreseeable future.

The U.K. saw its currency fall to a 31-year low against the U.S. dollar at the start of October after British Prime Minister Theresa May said Britain would start negotiations to withdraw from the European Union at the end of March 2017, and indicated she would prioritize control over immigration and borders, rather than access to the European single market.

Dryer, who is part of Aviva’s global indirect real estate team investing in indirect and direct real estate, as well as debt, says there is so much uncertainty surrounding the U.K.’s withdrawal from the European Union that tenants are holding off taking on more employees, or leasing up new spaces, adding to Britain’s property market slowdown.

“People are spending a lot of time trying to guess what’s happening,” he says, “and so we have a bit of a lag in [occupancy] take-up. We thought the U.K. would start to slow down; we had that in our forecast.”

However, he still sees “real demand for income from investors,” but returns would need to be underwritten with little-to-no economic growth.

Aviva Investors is seeing rising demand for longer-lease assets, traditionally provided by supermarket leases but moving to more alternative asset types such as leisure, Dryer says. “Pension schemes are looking at it from a fixed-income perspective.”

Another bright spot in the U.K. commercial real estate landscape is demand for the private rented sector, or multifamily, says Dryer. “That is now becoming much more mainstream for institutional investors, and there’s a supply and demand dynamic so that there’s not enough new construction occurring in the residential market.”

One issue that Dryer is keenly focused on is liquidity—and the ability to trade in and out of funds in the secondaries market.

“I invest on a global basis and the key issue for our clients is how I get our capital out,” Dryer says. “It’s very important to make sure you have good investments and good funds, but something that is really important is the ability for secondary trades. It’s easy to get in [to funds]; it’s not so easy to get out.”

Aviva Investors expects to complete about $600M of secondary market transfers in 2016, and Dryer says he’s comfortable buying a secondary position at a premium, not least when open-ended funds are experiencing entry queues.

“Why not pay a premium to get into a fund because the opportunity cost is lost? It helps me with my returns for my client. I can’t understand why investors are not using the secondary market—it can be an advantage.”