CORE STRATEGY
Other funds that have turned to property include Lancashire County Pension Fund (LCPF), which has an £840m real estate portfolio, while London Pensions Fund Authority (LPFA) has £400m in the sector. These schemes are part of Local Pensions Partnership (LPP), a local government pension scheme pool.
Richard Tomlinson, who looks after real estate for LPP, says property is seen as an important part of these retirement schemes’ investment strategies. “Both schemes are maturing and the strategy is towards cash income and property is seen as a good source of that,” he adds.
Adding real estate to a pension fund is not a new innovation. Property, to some degree, was part of a retirement scheme’s investment strategy before the financial crisis forced the risk-free rate down to historic lows.
It is a case of increasing their allocations rather than building a portfolio from scratch. Indeed, the London Borough of Southwark Pension Fund had a 10% allocation to property in 2005; but today it is close to 20%. The lack of liquidity in the asset class has not deterred trustees from putting millions, even billions, of pounds to work in the sector.
The benefits stretch beyond generating a regular income stream. It provides much needed diversification, is a hedge against inflation and generally has a low correlation to other asset classes. Tomlinson is seeing a lot of pension fund capital flowing into bricks and mortar, which is having an impact on pricing. “It is a competitive market,” he adds. “Prices are being bid to levels where sometimes they are hard to justify.”
The rising cost of investing in real estate is not expected to ease anytime soon. All the schemes portfolio institutional spoke to about their property strategies are yet to achieve their allocation targets.
Lancashire has 11% of its assets invested in property, just short of its 15% target, while RPMI Railpen has a 12% weighting to the asset class, below its 15% goal. LPFA has work to do to close the gap between the 7.5% current allocation and its 10% target.
