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Pension funds turn to property amid low yields

16 Jan 2020

Long leased property will benefit from pension schemes’ flight from bonds in 2020, a survey of professional investors suggests.

A poll by Alpha Real Capital, which manages long income real assets, found over eight in ten professional investors expect pension schemes to increase their investment in the asset class over the next two years. It found that 20% of those surveyed expected a “dramatic” rise in allocations to the long income property.

Long Income Property is property leased to tenants for long periods such as 10 to 15 years. It is an asset class with defensive, value features providing income for investors rather than growth. Its returns are expected to be less volatile through market cycles than those of traditional property, Alpha Real Capital said.

Long income property also provides an inflation hedge for both income and capital, a characteristic eight out of ten of those surveyed said was one of its top three attractive features.

Other key advantages to long income property cited by 80% of respondents were income security, while 68% cited its attractive risk-adjusted returns.

In addition, the current low yield environment coupled with an uncertain macroeconomic backdrop has propelled institutional investors towards alternative forms of income such as long-dated secure income to meet their liabilities.

Hugo James, partner and head of long income, at Alpha Real Capital, said that as many nominal yields, especially in northern Europe, were currently negative and forecast to rise only gradually in the longer term, the secure income derived from long income property made it an increasingly attractive asset class for pension funds and insurers.

“Our research suggests that they will increase their allocation to this asset class, and this will also be helped by more long income property assets coming on to the market over the next few years,” James said.

In November 2019 Alpha unveiled a Luxembourg-domiciled European Long Income Fund, which is open to institutional investors. The fund targets Euro-denominated property in the Eurozone focusing on Germany, the Netherlands and Ireland.

Alpha Real Capital surveyed 50 institutional investors, 46% of whom were pension investors and 30% of whom were real estate investors in December 2019.

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