UK – BlackRock has established a long-lease property strategy for six pension funds at a time when investment managers are scrambling to launch the next generation of funds.
The £250m (€290m) raised for its UK Long Lease Property Fund, the first new venture for the company since announcing it would acquire property manager MGPA, highlights the growing interest from investors for secure-income, inflation-related property strategies.
BlackRock has ambitions to expand its real estate business and, along with AXA Real Estate, has become one of the first companies to launch a new long-lease strategy to compete with the handful of large, long-established funds, such as those managed by Standard Life Investments and M&G Investments.
Long-lease – or 'secure income' – property strategies are proving increasingly attractive to UK pension funds as alternative forms of inflation-linked income with which to match liabilities and diversify fixed income portfolios.
But while funds traditionally focused on acquiring long-leased supermarkets with fixed rental uplifts, changing market conditions have forced managers to broaden the scope of their investment strategies.
BlackRock's new fund will invest in alternative property sectors such as student accommodation, healthcare, housing associations and ground leases, as well traditional assets such as supermarkets and offices.
It has already invested £100m in a seed portfolio with an average lease term of more than 20 years.
Marcus Sperber, head of real estate at BlackRock in Europe, said: "Both traditional and non-traditional real estate can provide pension schemes with alternative sources of long-dated income, but we see alternative property assets coming more into vogue."
Established long-lease funds have also been compelled to invest in alternative sectors, mainly because high demand for traditional long-lease assets has made pricing prohibitive in many cases, especially in the supermarket sector, where there are a limited number of available assets.
For example, M&G's £1.5bn Secured Property Income Fund began investing in residential assets this year and together with M&G Real Estate has already deployed £300m to the sector. The fund recently funded the development of social and affordable housing units at Aberfeldy New Village in East London.
Invesco Real Estate is also looking to launch a secure-income, inflation-linked property strategy that would include alternative sectors and has identified mid-market, leased hotels as a sector that can offer secure income with the added benefit of low obsolescence risk.
The investment manager is also proposing a more "actively managed" strategy that could include buying relatively shorter leases and selling assets before they become "over rented".
In a paper by Simon Redman, managing director of client portfolio management, Invesco Real Estate argues that traditional long-lease strategies face four potential risks.
These include erosion of the initial capital investment through a lack of active management; a lack of effective management, "which can put current and future income at risk"; concentrating too much on a small pool of investments; and concentrating "solely on the 'in favour' long-lease sector".
The paper states: "By selling a property, or renegotiating its lease before it becomes too 'over rented', it is possible to reduce or remove the 'at risk' income. Furthermore, it places less reliance on investing just in long leases but permits some shorter income duration in a portfolio."
Andrew Hills, director of client portfolio management at Invesco Real Estate, told IP Real Estate: "These will be long leases, but they don't have to be the longest leases. It's been very popular to be anything from 25 years-plus.
"If you are being more active and protecting your residual value a little bit more, you've got a bigger universe, you can probably get a higher initial yield.
"Real estate has equity and bond characteristics. Some people look at this as if it's purely a bond. Real estate is not purely a bond. You can buy a certain kind of real estate that has very bond-like characteristics, but it's still not a bond. It ultimately still requires active management and fundamental real estate decisions."
Hills also said there would be potential to extend secure-income strategies beyond the UK market.
"There is no real reason not to move out into Europe as well, rather than just the UK," he said.
"There tends to be very high correlation between European inflation and the UK."