NEST is preparing to move towards a segregated domestic real estate mandate as the UK workplace pensions provider looks to increase its oversight of underlying assets and identify opportunities to finance new development.
Liz Fernando, chief investment officer at NEST, said the £68bn (€81.6bn) pension fund had selected a preferred investment partner and was working on mandate guidelines.
The new arrangement is expected to give NEST greater visibility over individual investments while retaining the external investment manager’s responsibility for final investment decisions.
Fernando said the move reflected the pension fund’s growing scale and the development of its internal property expertise, which have made a more tailored investment arrangement possible.
“We’re now of a scale where, and we have the team where, we can have more influence and control over what’s going on in that portfolio,” she said.
The mandate will have similar objectives to NEST’s existing pooled UK real estate fund – which is managed by Legal & General – with a core strategy and the ability to undertake some development.
However, the segregated structure will give the pension provider greater visibility of individual assets and more control over the sectors in which it invests.
The move forms part of NEST’s wider private markets programme, which has expanded over several years to include real estate, private credit, infrastructure, renewables and private equity.
The provider has around 19% of its portfolio invested in private markets, with UK real estate its largest allocation. Fernando said NEST’s priority is now to continue deploying capital in a disciplined manner as its assets under management grow.
Balancing UK investment and returns
The shift comes amid growing pressure on pension schemes to increase investment in UK assets under the Mansion House Accord. However, Fernando said domestic investment opportunities must still compete with international assets on their financial merits.
She said that NEST recognised that its members want their pension savings to support UK infrastructure and productive assets that can benefit local communities, create jobs and improve services, but members also expect good financial returns.
“If you had two exactly identical assets with exactly the same expected return and risk characteristics, one’s in the UK, one’s internationally, we would choose the UK,” Fernando said. “But it’s still that competition for capital.”
NEST uses a total portfolio approach in which investments are assessed against the objectives and risk characteristics of the relevant portfolio. UK assets do not receive preferential treatment simply because they are domestic.
The same discipline applies to productive investment, a term Fernando said was open to interpretation. Buying an existing asset may simply transfer ownership rather than directly contribute to economic growth, although a secondary transaction could release capital for a developer to invest in new projects, she said. NEST is therefore interested in opportunities to support the development of new assets, including housing and infrastructure.
NEST’s commitment to productive UK real estate is already taking shape through its build-to-rent joint venture alongside Legal & General and Dutch pension fund investor PGGM. The platform, which expands on L&G and PGGM’s access development partnership, targets up to £1bn in total UK rental housing development.
Fernando said the partnership was a clear example of productive investment because it added housing that did not previously exist.
Recent acquisitions under the venture include a six-acre brownfield NHS site in South London for a £350m 700-home scheme, as well as a site in Manchester’s New Jackson neighbourhood for a 51-storey, 494-home tower being developed in partnership with Renaker.
NEST’s infrastructure and renewables portfolio, managed in part through its relationship with IFM Investors, also includes the construction of new greenfield assets.
For Fernando, the potential benefits of productive investment extend beyond the assets themselves. NEST’s membership is made up of UK workers and so a stronger economy with more and better-paid jobs could support employment and pension contributions, alongside the returns generated by their savings, she said.
“If we can do things which are going to help stimulate the economy, stimulate productivity, benefit the members through job opportunities and great financial returns, it’s just a really sensible thing to do,” Fernando added.
However, she stressed that investments must be selected for the right reasons, with confidence in how assets will be used and managed.
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