Changing real estate portfolio to fit a maturing pension scheme

Our client wanted a more income-focused approach to their property investments, so we introduced an inflation-linked real estate approach.

The background

Our client, a £2bn pension scheme, was looking to make changes to their £100m legacy property portfolio. The portfolio consisted of c.20 segregated properties managed by a third party. Given the relatively small lot sizes and regional bias, performance had been below expectations following the financial crisis. We felt that a real estate portfolio that better matched the maturing liability cash flow profile made more sense for them.

Our solution

We proposed an inflation-linked approach for their real estate portfolio, specifically properties with long-term leases (20 years or more) where rental income had a guaranteed contractual-link to inflation.

We believed that this strategy was best implemented using a collection of pooled commercial real estate funds, and recommended that the client appoint a “fund-of-fund” manager to implement it.

What did we do?

• We helped the trustees understand the merits of an inflation-linked approach and why it was a better fit for their maturing scheme.
• We identified a suitable “fund-of-fund” provider to implement the strategy.
• We worked with the appointed provider on the portfolio guidelines, restrictions and permitted investments necessary to deliver the RPI+2% target.
• We provided advice on the legacy manager’s proposals to sell-down the client’s segregated properties, using cash raised to build the new portfolio.

The results

The legacy portfolio was sold gradually over a 24-month period. Prospects for smaller lot size property improved over this period, so it was an opportune time to sell. The “fund-of-fund” manager used sales proceeds to invest in several inflation-linked property funds, including (balanced) long-lease commercial property, student accommodation, leisure centres and ground rents.

The new portfolio has outperformed the RPI+2% target by 4% pa since inception in 2013.

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