FOREWORD by Rupert Sheldon, Head of Core REIM UK
Defined Benefit (“DB”) Pension Schemes in the UK have traditionally sought to generate required levels of investment return via investing across a balanced strategy, including bonds, equities and alternative assets. These typically include private market strategies such as real estate, private equity and more recently infrastructure.
As each scheme moves towards maturity, the need to de-risk and ensure future pension liabilities are matched by defined and certain investment returns typically
skews investment portfolios towards the security and certainty of fixed income and the liquidity that such investing can provide. However, post-Global Financial Crisis (“GFC”) socio-economic and political risks, along with Quantitative Easing, has driven a flight to safety and defensive investing. This has pushed bond yields to historic lows and large numbers of mature DB pension schemes into deficit. This dynamic has been exacerbated by an ageing population across major western
economies with DB pension schemes required to support more retirees (“liabilities”) for longer from, in many cases, a proportionately smaller contributing workforce (“assets”). This dynamic is referred to as the pension ‘timebomb’ and is starting to tick loudly now for a number of mature DB pension schemes.
So how can UK commercial real estate provide a solution to what is becoming one of the defining problems of our time? One answer is via a well-structured, well-executed long income strategy, enabling schemes to achieve stable and dependable index linked liability matching over periods of 20+ years, whilst also providing longer term distributable income returns of over 4.0% per annum. At a period in the cycle where comparable duration gilts provide 1.0%-1.5%, this can offer real appeal and a welcome boost to scheme returns.
The key to such ‘bond proxy’ investing is to execute within clearly defined risk parameters, ensuring that income streams are long in duration, secure in nature and progressive via inflation linked indexation. Core long-income investing into UK real estate can achieve all of these things if deployed within a strategy that targets secure income and strong terminal residual land values. Furthermore, with returns generated via a series of direct asset ownerships, the ability to acquire and manage within a sustainable framework can ensure responsible ESG investing.
This paper explores the case for investing into UK core long-income real estate as part of a balanced investment strategy for mature DB pension schemes.
1) Definition of Long Income Commercial Real Estate
2) UK Commercial Real Estate and the Appeal of Long Income
i) Real Estate in the context of UK DB schemes
ii) A diversifying asset class
iii) Attractive risk adjusted returns
iv) Income return – a consistent driver throughout cycles
3) Accessing the Long Income Market
4) How to Manage Risk
5) The Key to Successful Investing into UK Core Long Income Commercial Real Estate
6) About Fiera Real Estate