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Pension funds drawn towards long-income real estate assets

Tue 03 Jun 2014

Pension funds are finding long-income real estate assets increasingly attractive investment propositions, experts have noted.

According to M&G Investments, the bond-like qualities offered by a well-diversified long lease fund are very appealing to institutional investors.

This has led to the group seeing a growing number of pension fund clients with liability matching requirements being tempted by the "capital growth that can be generated by the underlying real estate over the long term".

Ben Jones, manager of the M&G Secured Property Income Fund at M&G, cited a £68 million Sainsbury's superstore in East Dulwich, London as an example of the kind of real estate that is attracting attention at the moment.

The retail outlet, which has 25 years left on a 30-year lease, was described as a "highly attractive" asset situated in an affluent part of the capital.

Mr Jones said the strength of the lease makes it unique right now, since it offers "annual RPI rental uplifts with a valuable collar of 1.5 to five per cent".

He also noted that the future development potential of a site can have an impact on its long-term value.

Mr Jones said this is particularly strong in the case of the Sainsbury's superstore in London, as it is located in a desirable residential area.

Kris McPhail, investment director at M&G Real Estate, added that since it began investing in long lease real estate 15 years ago, the market has evolved.

Indeed, he said that while it started out investing in offices leased to government bodies or corporate enterprises, the "investible universe" now covers all sectors of commercial real estate.

Mr McPhail noted that the turning point came nine years ago, when supermarkets "ignited the development of the market through their extensive sale and leaseback programmes".

James Duncan, a partner at Winckworth Sherwood Solicitors, commented: "Pension and insurance fund managers understand that long-term real estate assets are an income investment rather than a speculative property investment.  

"As institutional managers look deeper into the market for new alternative asset classes there is increasing institutional interest in long term residential real estate assets.  

"Institutional managers now understand that investment in housing as an asset backed alternative investment has similar characteristics to infrastructure investment.  

"To widen the investor pool and open this market to non-institutional investors and develop more housing in-line with government policy requires all stakeholders to understand the investment model properly.

“New or adapted cost-effective investment structures which meet the requirements of this new investment market are needed. Current investment structures for retail investors are not cost-effective, too complicated and from a tax point of view, do not deliver a level tax playing field compared to similar commercial property investments structures.”

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