UK Pensions Could Benefit from Diversified Property Investments

UK pensions would benefit from both increasing and diversifying their asset allocation of property investments, according to a new white paper released by insurance company Aon Hewitt.

Property allocations within pension portfolios are typically in the form of UK core commercial property, either by investing in commingled funds, or as a segregated arrangement. However, in recent years, there has been an increase in the investable opportunity set within the property asset class, according to the white paper.

“Overall, we believe a well-diversified property portfolio across different strategies and regions – rather than just focused on UK core commercial property – will help schemes and their wider investment and funding objectives,” said Nick Duff, partner at Aon Hewitt.

The firm said funds that focus on property debt, long-term inflation linked cash flows, the private rented sector, and other aspects of the real estate industry are now easily accessible for pension plans.

“There are a wide range of investment opportunities within the property universe,” said the white paper. “Having a more robust property portfolio by using the full opportunity set within the asset class would allow pension schemes to tailor the portfolio to suit their specific needs.”

In addition to pensions diversifying away from UK commercial property, the white paper said plans should consider higher overall allocations to property in relation to equities and bonds. UK commercial property has been a boon to pension plans in recent years, as the sector has delivered returns of around 9% a year since the end of 2008, says Aon Hewitt.

The white paper cited a few property strategies pension plans can employ, which it labeled as “income generation,” “return seeking,” “inflation linkage,” and “diversification.” An “income generation” portfolio has an allocation of 70% core commercial property, 20% property debt whole loans, and 10% property debt senior loans. A “return seeking” portfolio has an allocation of 50% core commercial property, 15% property debt whole loans, 15% property debt mezzanine, 10% private rented sector, and 10% value add. An “inflation linkage” portfolio has an allocation of 50% high lease value, 25% core, and 25% rented sector. And a “diversified” portfolio has an allocation of 50% core, 20% property debt, 15% higher lease value, 10% private rented sector, and 5% value add.

“These opportunities offer a range of attractive risk-adjusted returns,” said the white paper, “and can help pension schemes navigate a world where the yield and expected return on traditional asset classes remain low compared to historical standards.”