Pension funds stake out real estate for inflation hedge, EPRA hears

Real estate is becoming increasing attractive to pension funds looking for inflation-linked assets, according to speakers at the 2014 EPRA Conference in London.

According to Amin Rajan, Create Research: 'The days when pension plans expected double digit returns on their portfolio are gone. Returns expectations have gone down and they have started looking for surrogate assets. With banks running down their balance sheets there are now new assets coming onto the market and it is possible to achieve around a 7-9% yield. Real estate is seen as a hybrid asset class. It generates more than one benefit, giving a decent yield, regular cashflow and it provides protection against inflation.'

Real estate sits between equities on the one side and bonds on the other, he added.

Real estate could therefore be a solution to pension funds’ quest for inflation-linked assets, according to Joanne Segars of NAPF, the UK’s leading voice on workplace pensions. 'The UK is very different to some of the other pensions markets such as those in the Netherlands and the US because we have inflation-linked benefits locked into our system so our pension funds have to have inflation-linked assets to match those liabilities,' she said.

The NAPF has responded to this by establishing a new infrastructure fund for pension funds. The Pensions Infrastructure Platform (PIP) Ltd is a not-for-profit infrastructure fund established earlier this year to provide that inflation-linkage for the long term more suited to pension funds. However, she acknowledged that it could be difficult to differentiate between what is infrastructure and real estate due to traditional and sometimes inflexible asset class definitions.

'Most pension funds in the UK don’t have huge investment or real estate teams. That’s why we spent so long establishing the pensions infrastructure platform. One of the reasons we set this up was because they need more information on infrastructure but it also meant that by acting together we could collectivise our expertise.

'Within particular asset classes there are sub-classes, and pension funds as investors with their advisors will look closely at the risk-return profile of a shop on Oxford Street, London versus a science park in Cambridge, to get it right. The risk profiles are different and we need to put them in different risk buckets.'

“Pension funds are really in there for long-term inflation-linked assets and that is what real estate can provide,” she added.