Feature – Property
interest in the matching type of assets, of which real estate also forms a part and to income-generating real estate like long- lease property.
Matching or income The degree of a pension scheme’s relationship with property depends largely on what it is trying to achieve. Factors such as whether the scheme is targeting a buyout, the nature of its cov- enant and the income profile will direct the role it wants differ- ent asset classes to play in various investment strategies. A scheme can invest in property for growth reasons and enjoy strong returns of up to double digits depending on the market; or it can invest in property for income, Matthew Graham points out. This then leads to questions about how to invest in prop- erty, perhaps literally buying a building or lending on it and where that property will be, in the UK or overseas. The differing uses to which property can be deployed by pen- sion schemes is illustrated by the blend of approaches adopted by the Nationwide Pension Fund. Mark Hedges, Nationwide Pension Fund’s chief investment officer, explains that the scheme has two portfolios, one for matching assets and one focused on return-seeking assets, between which it splits its property investments. The scheme has four UK properties in the alternative match- ing asset portfolios, including residential and commercial ground rents. These are long-dated cash-flows that have a
degree of inflation linkage, which match its liabilities. It also has some 25 year-long lease properties, is invested in two funds and has just backed a mid-market rent fund being operated by Places for People, an affordable housing scheme with low market rents that are linked to inflation, which pro- vides a good match for its liabilities.
“Property does generate higher returns than gilts, for example, but it is very much held for the long term to match the long- term cash-flow needs of our pensioners,” Hedges says. Real estate is covered by Nationwide’s return seeking assets portfolio, in which sit a mixture of different funds, with some directly owned property trying to generate returns of the retail price index plus 5%.
The funds are broadly split 55% to matching assets and 45% to return seeking assets, which include equities and credit with around 20% in private markets, consisting of private equity, infrastructure and real estate. “Real estate could be 5% to 6% of the fund but we don’t have set allocations,” Hedges says. “We do not have a prescribed limit which says we have to put a certain amount in real estate. If you are a big fund you have to do that, but we are small enough to be more nimble and pick the right opportunities at the right time.”
From a broad allocation perspective, we see 2020 as another pretty decent year of capital flows into the asset class, no question. Indy Karlekar, Principal Real Estate
Winners and losers Another trend in pension funds’ growing interest in property is towards more focused capital allocations. Principal’s Indy Karlekar says investors have become much more driven by spe- cific strategies with some focusing on opportunistic strategies, while others concentrate on core strategies. The Centrica Pension Fund has 5% in direct UK property that buys commercial property in a traditional sense. In addition, there is just over 5% in longer dated cashflow generating prop- erty options, such as long-lease property and ground rents. In order to access the longer-dated income type of property it is in a variety of pooled funds, one for long-lease property, one for ground rent and one for commercial income strips. The scheme has found longer-dated cash-flow generating prop- erty especially attractive, the types of property include hotels, supermarkets, and key strategic council buildings like libraries or townhalls. Within the longer dated commercial property income strips the underlying fund manager has invested in council buildings and student accommodation, making agreements with the universities. Ground rents started off with a focus on residen- tial property but over time has been complemented by com- mercial ground rent deals, which can hail from any type of cor- porate entity.
Behind the flourishing relationship between property and pen- sions lies another story: that of the demise of the British high
40 | portfolio institutional February 2020 | issue 90
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