Kent ups property to benefit from stronger yields

More schemes are increasing their exposure to property as a result of growing confidence in the real estate market and stronger relative yields compared with bonds and equities. 

Members of Kent’s superannuation fund committee decided last month that a further £60m will be invested in property.

Property is the only thing we do feel comfortable putting money into

“Property is the only thing we do feel comfortable putting money into,” said Nick Vickers, head of financial services at Kent County Council, adding: “One of our investment managers said it’s a once-in-a-lifetime opportunity."

The £3.8bn fund currently has 7.9 per cent of its assets allocated to property, according to its 2013 annual report.

Part of this additional investment will come from funds currently held in equities, Vickers said.

“We have begun to see an increased demand for property over the last six to nine months and the simple reason is price,” said Andrew Jacobson, senior investment consultant at LCP.

Prime London property has traditionally been of more interest to schemes but there is now an increased demand for secondary property, which is good quality but may not be located in the best area, he said.

“[Schemes have] begun to look away from [prime property] as that part of the market has attracted a lot more money – prices have gone up so yields have gone down,” said Jacobson.  

There is a window for schemes to invest in property over the next 12 months, said Bernard Nelson, senior investment consultant at Buck Global Investment Advisors.

“The yield gap between primary and secondary has got to its highest ever,” Nelson added.

While schemes can expect a yield of 5-6 per cent for prime property, second-tier property is yielding around 7-9 per cent, consultants have said.

Schemes choosing property investments should consider how they want it to sit in their portfolio, Jacobson said.

“If you want a substitute for equities you want to invest property that will deliver real returns; if you want a substitute for bonds, an annuity property that is focused on long leases might be more applicable,” he said.

Kent's growth assets

At March 2013 the fund had an allocation of 70.4 per cent to equities against a benchmark of 64 per cent.

The superannuation fund committee decided to maintain this position. “If you take that overweight position off the table, where do you put that money?” Vickers said.

The fund did not want to invest any further in fixed income or hold more assets in cash, he added.

The scheme's funding level also increased to 83 per cent at March 31 2013 from 77 per cent in 2010, according to the fund's initial valuation results.

“Investment returns were substantially above expectation, pay increases were less and we had more deaths than expected as well,” said Vickers.