It purchased a portfolio for £252m of over 4000 homes, let to Places for People, one of the largest property management, development and regeneration companies in the UK. L&G will lease back the properties on a 50-year basis, while Places for People will use the proceeds from the sale to build 7000 new housing units over the next seven years.
Real estate debt for pensions
Although insurers are queuing up for infrastructure assets, pension funds seem to be more reticent. As Colin Fleury, head of secured credit at Henderson Global Investors, says: “We have chosen not to invest in either direct lending to SMEs or infrastructure debt for a number of factors. With infrastructure, the loans are lumpy and complex deals to underwrite, plus the deal flow in the UK for example is sporadic. I think these deals are better suited to the large insurers who have annuity funds that can provide long-term financing rather than pooled investment funds.
“As for SMEs, there is a lot of discussion about banks not lending enough but they have not disappeared and are still involved in lending senior debt. It is difficult to compete with them when they are able to subsidise the loan with other parts of their business. We believe that the logical place for us to be is in commercial real estate debt where a broad range of strategies are available that fit different risk/return profiles.”
John Atkin, director of fixed income at M&G Investments, adds: “Pension funds want long-dated assets and they are willing to take an illiquidity premium to hedge their liabilities. We believe there is a wide range of opportunities such as long leases in real estate which provide long-dated inflation, asset- backed securities and social housing. The market though has become expensive and the question investors need to ask is: ‘am I being rewarded appropriately for the risk I am taking?’ You have to be vigilant and flexible.”
M&G particularly favours social housing and recently struck a deal to fund the development of 233 social affordable and private rental homes for Poplar Housing and Regeneration Community Association (HARCA). Completion of the project will initiate a 30-year lease to Poplar HARCA, at an initial rent of £2.64m with annual rent reviews linked to inflation.
When it expires, the social and affordable units will revert to Poplar HARCA for £1 and M&G will retain ownership of the private rental units (with Poplar HARCA having the right to renew its lease over those units).
Madeline Forrester, head of UK institutional at Axa Investment Managers, also sees potential in real estate debt. “Pension funds look at the environment and there are generally speaking two buckets: growth, which includes equities; and alternatives and liability- matching, which is typically fixed income. I think there is now a middle bucket which includes assets that produce long-dated cashflows, but also deliver a better return than government bonds.
“We think commercial real estate is in that category because even though there is credit compression, spreads have stayed relatively stable against single Arated corporate bonds and you can still get 200 to 250 basis points for a senior secured investment.”
Investors need to be selective over the opportunities in private debt because while there is wide interest, infrastructure, with its more sporadic deal flow, is perhaps a better fit for large insurers, while the broad range of real estate debt strategies suits the risk/return profile of pension funds. Before taking the plunge therefore, careful consideration by investors is a must.
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