UPDATE 1-Aviva to set up UK residential rental fund

* Aviva Investors working on UK resi fund with CBRE

* Sees opportunity to buy resi assets in key locations

(Recasts lead, adds details and quotes)

LONDON, July 27 (Reuters) - Aviva Investors, a unit of British insurer Aviva (AV.L), said on Monday it is in the process of setting up a fund with property brokers CB Richard Ellis to buy and rent out new UK residential properties.

The fund is in response to an initiative by the UK Government's housing agency, launched in May to attract investments into the housing market by encouraging institutions to finance new homes specifically for private rent, it said.

"We are working with CB Richard Ellis (CBG.N) regarding this initiative and are in the early stages of working to develop a proposal," Andrew Appleyard, Aviva Investors' head of real estate specialist funds, said in a statement.

"Given the current market circumstances we believe that we now have a genuine opportunity to acquire institutional quality investment assets in key locations," he said.

Average UK house prices are seen falling 8 percent this year, after already sinking 16 percent in 2008, a Reuters poll of 35 analysts in June showed. [ID:nLAG003534]

An Aviva spokesman said there is no planned launch date for the fund as it is still at the early stages, and declined to confirm a Financial Times report earlier on Monday that the fund will raise up to 1 billion pounds ($1.65 billion).

The venture has a third unnamed U.S. residential manager partner, and would pre-order purpose-built residential blocks in the southeast to rent out, mainly around large transport hubs and significant regeneration sites that have stalled due to the economic downturn, the FT reported. (Reporting by Daryl Loo and Rhys Jones; Editing by Andrew Macdonald) ($1=.6075 Pound) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)