UK - Legal & General Pensions (LGPL) is to invest in UK real estate for the first time on behalf of its £23bn (€26.6bn) annuity business.
A £750m segregated mandate has been awarded to Legal & General Property (LGP), a subsidiary of Legal & General Investment Management.
Offering an attractive alternative to the more traditional annuity products, which typically invest in corporate bonds, gilts and inflation swaps, the real estate investments will aim to provide superior diversification, liability matching and risk reduction.
Focused around surety of income, LGP will seek to acquire assets or portfolios worth more than £40m and let to secure covenants on minimum 20-year lease terms.
LGPL has an allocation of up to £2bn to invest in ungeared direct commercial property over the next two to three years, for which LGP will source suitable assets.
The annuity mandate will run in parallel to the Limited Price Inflation (LPI) Income Property fund, launched earlier this year, which provides corporate pension schemes with secure, inflation-linked income streams.
Both mandates may also joint venture on portfolios and larger schemes.
LGP has already acquired an initial portfolio - two Tesco Extra stores in Scunthorpe and Glasgow - for a total consideration of £98m, which will bring the value of current acquisitions of behalf of the annuity mandate to £125m.
Let to Tesco Stores, at initial rents of £2.4m and £2.32m, respectively, the leases are non-assignable during this period, and the rent will be subject to inflation-linked annual uplifts.
LGPL's annuity products include both individual and bulk purchase annuities, which are often linked to inflation, and so the mandate will be particularly focused on delivering returns linked to the retail price index (RPI).
By combining typical upward-only rent reviews with annual, RPI-linked rent review structures, the portfolio is intended to closely match annuity-driven liabilities.