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Consultants Deliver Aviation Assets Warning

Aircraft leasing can produce a yield of more than 8 percent, according to Tony Foster, a senior investment manager at Aberdeen Asset Management.

  • Joe McGrath

Investors eyeing aviation finance as an income-generating asset should closely scrutinize current aircraft valuations and market supply levels, investment consultants warn.

Institutional investors such as insurers and pension funds are attracted to aviation assets for their relatively higher yields in today’s low interest rate environment. German asset manager KGAL Real Investments said in a report last week that twenty-eight percent of investors managing a combined €1.1 trillion ($1.23 trillion) in assets planned to make an initial or increased allocation to aviation. That compares with 25 percent of investors planning the same for infrastructure, 17 percent for real estate and 17 percent for renewable energy.

The loan-to-value ratio, or the amount of borrowing compared to the value of each airliner, is currently high, according to Pete Drewienkiewicz, head of manager research at U.K. investment consultant Redington. That should be a warning sign to investors reaching for yield in aviation finance.

“It is quite a dangerous space to get into as a single, siloed, investor,” he said in an interview. “Potentially the market is still quite hot.”

An April report from consulting firm EY noted that insurance companies and pension schemes have been seeking “higher risk-adjusted returns” in unconventional areas beyond traditional loans due to the sustained low-yield environment and demanding regulatory requirements. Aviation debt may be considered an “interesting prospect” because of the premium offered for its complexity and reduced liquidity, EY said in the report.

There are concerns about the aircraft leasing market, as well.

“In terms of where we are now, I think I would be loathed to invest too much into newer aircraft leases,” said Gregg Disdale, head of private debt at Willis Towers Watson. “There are broader market noises around whether there is potential market oversupply.”

Investec Aviation, whose clients include Australian and U.S. pension funds as well as U.K. and South Korean insurers, is emphasizing the relative value of aviation financing. “Nobody can say we are at the peak,” said Alok Wadhawan, head of Investec Aviation. “It all comes down to the relative value and, the fact is, on a relative basis, aircraft still provides good returns.”

Aircraft leasing can deliver a yield of more than 8 percent, compared to infrastructure assets which are typically between 4 percent and 5 percent, according to Tony Foster, a senior investment manager at Aberdeen Asset Management.

“Financing has come back in a big way and lots of people have made a genuine success of buying mid-life aircraft and leasing them out,” Disdale said. “Today we would be more cautious about doing something stand alone because of the amount of capital that has gone into that space.”