UK - Legal & General Property (LGP) has become the latest fund manager to offer defined benefit pension funds access to real estate providing inflation-linked income.
The Limited Price Inflation (LPI) Income Property Fund, launched by the real estate fund management arm of UK insurer Legal & General, offers prospective investors exposure to UK real estate with inflation-linkages and significantly lower volatility than would normally be expected from a typical property fund.
The fund is designed to offer pension funds an alternative to traditional index-linked gilts and bonds, which are used for hedging against inflation and interest rates - and potentially as part of liability-driven investment (LDI) strategies.
To achieve this, the portfolio will be structured around properties whose value is predominantly derived from their leases.
The fund will hold assets primarily let to government or quasi-government tenants for a minimum of 20 years, with their income streams linked to inflation through LPI-linked rental uplifts.
LGP's is the latest fund to pursue such a strategy, following in the footsteps of M&G Investment's Secured Income Property Fund and Pramerica's UK Real Income Fund.
M&G's product has been actively investing in the UK in recent months, while Pramerica's vehicle was launched in September 2009.
Pramerica launched a paper in October 2009 highlighting how UK commercial property could be used within LDI portfolios.
LGP's fund will be diversified both by sector class and geography across the UK and will have a target size of £500m (€576m), with no gearing, either direct or indirect.
The fund manager claimed it was in a unique position to take advantage of the sale-and-leaseback assets currently being offered to it through on and off-market opportunities with banks and public sector bodies.
Michael Barrie, director of balanced funds at LGP, said: "Offering a new innovative approach to pension investors looking for a secure higher yield alternative to long-dated, index-linked bonds, the fund combines liability matching with reduced volatility, based on inflation-linked income streams.
"Although the capital values have recovered strongly in recent months, the yield gap between inflation-linked properties and equivalent index-linked gilts offers a very attractive opportunity to our investors."
He continued: "It may be some while before rental levels in the UK begin to recover and many investors will prefer an income stream that rises with inflation over one that is linked to the underlying occupier market.
"Furthermore, with even the extent of a government's debts being debated in recent times, the knowledge that a physical asset lies behind this competitive yield provides even greater security, whilst also offering the opportunity to benefit from capital gains over the medium to long-term," he added.