Low gilt yields are forcing schemes to pile into bricks and mortar. Mark Dunne asks if the reward is worth the risk.
It has long been said that an Englishman’s home is his castle; but these days it could be his pension too. The office where he works, the shop where he buys his groceries or the warehouse that sends him the latest bestseller to read on his early morning commute could also be funding his retirement.
With the yield on 10-year UK government debt hovering around 1% in recent years, several retirement funds have turned to bricks and mortar to help pay their members’ benefits. Yields range from 3.25% on offices in London’s West End to 5.25% on retail warehousing at the side of motor ways, according to estate agent Savills. So it is easy to understand why institutions have been lured to these assets in a low return environment.
Another reason is risk. Pension schemes have been forced to stomach more risk to generate much needed cash, but the longer-term returns offered by real estate are, on average, considered to be within reasonable risk parameters compared to equities.
One fund that has built a sizable allocation to property is RPMI Railpen. It has £2bn tied up in bricks and mortar, or 12% of the £28bn of assets it manages for the Railways Pension Scheme.
“We certainly believe in property,” RPMI Railpen head of property Anna Rule says. “We are looking for new, interesting opportunities that are going to meet our target return.” She does, however, admit that this approach has been built partly out of necessity. “The strategy also reflects the need to look at alternative asset classes in light of lower bond rates.”