Pension funds pile into Pramerica fund targeting UK ground rents
EUROPE - Pramerica Real Estate has raised close to £100m (€163m) - mainly from corporate pension schemes - for a fund targeting UK ground rents.
UK fund management director Paul Dennis-Jones said pension funds faced with bond yields of 0.5% were reallocating part of their fixed income investment toward a niche asset class offering between 4% and 4.5%.
"The characteristics are fixed-income in nature," he said. "Investors are pulling out of bonds for this - or they're viewing it as low-yield property."
Equity generated by the recent acquisitions of ground leases of more than 100 years in London, and another on a portfolio of holiday homes, will bring the fund's value to £225m.
Pramerica's announcement comes just weeks after Aviva Investors launched a similar fund targeting defined benefit pension funds, with seed investment from the Aviva Staff Pensions Scheme.
That fund is one of four targeting liability-matching assets in social housing, student accommodation and commercial assets, as well as ground rent.
Jo Silmon Clyde, head of retirement LDI at Aviva Investors, said: "The reason these funds work is the premium attached to liquidity.
"When liquidity wasn't an issue, the premium was low. Now it's dried up, investors prepared to supply it for long periods can take advantage of the high premium.
"What's interesting here is not ground rent in itself, but the pension schemes' ability to access the liquidity premium."
The hurdle for both funds is a limited pool of assets.
Dennis-Jones said: "We're managing to find ground rents in sufficient quantity to meet the demand, but you have to look for them. People don't want to sell them. They only do it if they need the money or to diversify a portfolio."
Unlike Pramerica, which is focusing on existing assets, Aviva has cut deals with developers to acquire ground rents at source.
Clyde said: "Modern assets have more attractive ground rents. The old ones doubled every 25 years. New ones increase every seven years in line with RPI, escalate more frequently and are inflation-linked.
"If you look at the market, a lot of ground rents are owned by private investors or leveraged investors. There is existing stock, but we haven't had to look at it yet."