There is more to bricks and mortar than offices and shopping centres. Mark Dunne examines the niche property options available for income-hungry pension funds.
“Property is more liquid than government bonds through the income it provides. You might not be able to sell it tomorrow, but if you sit on it for a year you could earn six years’ worth of gilt yields.”Ben Habib, First Property
Government debt is not what it used to be. Yields on 10-year gilts stood at 11.7% in December 1990, but by February this year the risk-free rate of return had slumped to a dismal 1.24%.
This decline has sent many pension fund managers up the risk curve in recent years in search of a bond proxy. The quest for an asset class that meets their long-term funding commitments and could help narrow the aggregate £223.9bn defined benefit (DB) scheme deficit has led many to the property market.
The regular income property provides from leases that sometimes stretch for decades and with rents rising in-line with inflation understandably makes the sector attractive. This is despite the sector’s illiquidity, which saw several open-ended funds suspend trading as investors raced to get their money out following the UK’s vote to leave the European Union in June.
Ben Habib, chief executive of real estate investor First Property, believes that the income benefits in the current environment outweigh any concerns over liquidity. “Property is more liquid than government bonds through the income it provides,” he says. “You might not be able to sell it tomorrow, but if you sit on it for a year you could earn six years’ worth of gilt yields.”
Investing in offices and shops are popular choices. There is a need for places to work and to buy things. But with retailers struggling to fight off completion from their internet-based rivals and an over-supply of office space mixed with a potential hard Brexit and an upcoming increase in business rates, rents here look vulnerable to a cut.