BAA Pension Scheme has allocated £100m to long-lease property, as defined benefit schemes continue to invest in the asset class to act as a long-dated inflation hedge, consultants have said.
The £2.8bn airport operator scheme has issued a long-lease property mandate, of which approximately half of which was funded at September 30 2013, according to its most recent annual report and accounts.
The allocation was funded via the scheme’s Libor-plus portfolio as well as its hedging and cash assets, the report stated (see box for its asset allocation).
BAA's asset mix
Equity: 21%Credit: 20%Property: 4%Macro-orientated: 9%Libor-plus: 22%Cash and high quality bonds: 24%
BAA, which owns Heathrow, Southampton, Glasgow and Aberdeen airports, declined to comment further on the changes.
DB schemes have invested in the long-lease property to gain the benefits of its inflation-linkage and as an alternative to low-yielding gilts, experts said.
Nick Spencer, director of alternatives in the consultancy team at Russell Investments, said some schemes have invested in more secure areas such as infrastructure debt and ground rents, which have more backing and are more secure, to gain inflation-linkage.
“The next stage [would be] long-lease property where you have long-term contracts, 15 to 25 years,” said Spencer. “They’re usually high quality tenants, often you look for an inflation-related lease, something that will increase with inflation over time.”
BAA’s investment in long-lease property, which makes up 4 per cent of its total assets, is its only allocation to property.
Spencer said: “Some people actually wouldn’t necessarily have had much real estate investment in the past and come through this in terms of, ‘how do I get a better [liability-driven investment] portfolio?’”
Other changes at BAA
A subsidiary of Heathrow Airport Holdings sold Stanstead Airport Limited to Manchester Airport Group in February last year.
Active members of the scheme whose contracts of employment transferred to MAG could elect to transfer their accrued benefits to an independent scheme set up by the airport group.
The scheme paid £103m to this new scheme for transferred members. The BAA Pension Scheme was paid £34.9m from STAL to cut its obligation for deferred and pensioner members.
The scheme also switched £75m out of global equities into emerging market equities, shifting £25m each quarter from September 30 2012.
Investing in the asset class can generate a return that is 2-4 percentage points higher than an equivalent government bond, said Greg Wright, head of property and research in KPMG’s investment advisory practice.
“It’s all about trying to create an inflation-proofed bond,” he said However investment in long-lease property is not suitable for defined contribution, he said, adding: “The main reason being it’s just not liquid enough,” he added.
Returns on long-lease property are lower than could be expected around five years ago, consultants said, and schemes may suffer to achieve the same level of returns generated by core real estate investments.
Wright said: “That additional return you get over a government bond is becoming squeezed.”
Investment in a supermarket, which could have generated a return of 5-6 per cent five years ago, might now produce only around 4 per cent, said Wright.
One of the downsides of investing in long-lease property is the length of time it can take for institutional investors to find suitable properties to invest in.
As a result some managers operate a queuing system where they will take in money on a quarterly basis. “It is a less liquid asset class so you need to accept that there is time to invest,” Spencer said.
