In partnership with Legal & General Investment Management ("LGIM"), Legal & General Property ("LGP") announces the launch of a new product, the LPI (Limited Price Inflation) Income Property Fund (the "Fund"), which offers Defined Benefit pension schemes an innovative way to invest in property coupled with a secure source of income, primarily government-backed, all with inflation-linkage.
Providing pension investors with an attractive alternative to traditional index-linked gilts and bonds, which produce average real yields of around 1.5%, the fund aims to deliver a real (i.e. inflation-hedged) yield in excess of 4% per annum. To achieve this, the portfolio will be structured around properties whose value is predominantly derived from their leases.
The fund will hold assets which will primarily be let to government or quasigovernment tenants for a minimum of 20 years, with their income streams linked to inflation (LPI-linked rental uplifts). These assets provide secure, inflation-linked income streams ideally suited for pension fund investors, combined with significantly lower volatility than would be expected from a typical property fund.
The Fund will take advantage of the sale-and-leaseback assets currently being offered to LGP through its unique and extensive access to on and off-market opportunities, leveraging its in-house property expertise and relationships with banks and public sector bodies. The Fund will be diversified both by sector class and geography across the UK and will have a target size of 568 million (£500 million), with no gearing, either direct or indirect.
Michael Barrie, Director of Balanced Funds at Legal & General Property, comments: "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.
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."
Source: Legal & General