Pension funds to increase investment in long income property, says new research

Pension funds to increase investment in long income property, says new research

New research from Alpha Real Capital LLP reveals that over the next two years, 84% of professional investors believe the level of investment in long income property from pension funds will rise, with one in five (20%) anticipating a ‘dramatic’ increase.

Long Income Property is real estate let on long leases where the covenant strength and/or property/ income over-collateralisation offer defensive value characteristics for investors. The long-dated contractual inflation-linked income provides returns that are primarily driven by income rather than capital. The returns are expected to be less volatile through market cycles than those of traditional real estate, whilst providing an inflation hedge for both the income received and capital values over time.

Alpha’s research found that a combination of low European government and corporate bond yields, and an uncertain macroeconomic environment have led institutional investors to increasingly seek alternative sources of long-dated secure income such as long income property, to meet their liabilities.  Some 40% of professional investor surveyed by Alpha say they ‘strongly’ agree with this view, with a further 54% saying they ‘agree’ with it.

When it comes to the benefits of investing in long income property as an asset class, 80% of professional investors cite the income security it offers as one of the top three benefits of the asset class.  Investors (freeholders) typically have first ranking title in the event of tenant defaults, which is underpinned by the property value and/or income over collateralisation and/or the credit quality of the tenant. Also, the contractual cashflows have lower letting risk compared with traditional real estate on shorter leases, meaning cashflows are more predictable and secure over the long run.  

Eight out of ten professional investors (80%) also highlight the inflation protection offered by Long Income Property as one of the top three benefits.  The majority of Long Income Property assets targeted by Alpha have rent reviews that are linked to inflation.

Other key benefits include the attractive risk adjusted returns (cited by 68% of investors surveyed believe this is one of the top three benefits) and duration – institutional investors with long-dated liabilities can use the long-dated inflation-linked cashflow streams from long income property to match their liabilities.

Benefits for pension funds and other institutional investors from investing in Long Income PropertyPercentage of institutional investors who highlighted this as one of the top three benefits of this asset class
Income security 80%
Inflation protection80%
Attractive risk-adjusted returns       68%
Low volatility14%
Portfolio diversification6%

Hugo James, Partner and Head of Long Income, said“With many nominal yields – especially in northern Europe – currently negative and forecast to rise only gradually in the longer term, the secure income derived from long income property makes 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.”

READ ALSO : Alpha Real Capital launches European Long Income Fund