UK - Liability driven investment (LDI) portfolios should include commercial real estate, according to Pramerica Real Estate Investors.
In a new report, Pramerica, the real estate investment management arm of US-based Prudential Financial, said real estate was missing from LDI portfolios despite it having stable, long-term real income returns, as well as inflation-hedging and diversification benefits.
"There is a compelling case to be made that an LDI strategy in UK commercial real estate can benefit investors looking to match long-run liabilities," the report said.
"Commercial real estate produces stable, long-term real income returns with both inflation-hedging and diversification benefits, which can help investors to manage risks and earn excess returns."
The fund manager has demonstrated how to assemble an optimal LDI property portfolio by using International Property Databank's (IPD) UK annual index.
It highlighted how certain sectors, such as industrial and warehouse properties used in distribution and retail, consistently fit the LDI strategy better than other sectors, and regardless of the economic environment.
Pramerica said the case for using real estate in LDI strategies is even stronger when considering the current and expected future performance of the asset class's income returns in the UK.
"Relatively high income returns are expected to persist for several years and could help investors rebuild capital bases and repair balance sheets," the report said.
It said there were real risks around holding real estate, but added that "the year-to-year volatility in total returns is of more concern to short term investors than those with a longer investment horizon."
Pramerica recently launched a UK real estate fund targeting core assets which generate income, and track and exceed the retail prices index (RPI) by 4-5%.
The UK Real Income Fund will focus on sub-sectors such as supermarkets, prime retail, industrial and distribution warehouses.