Over the last 10 years, we have seen large-scale pooling of pension funds across England and Wales with Local Government Pension Scheme (LGPS) funds consolidating into collective investment vehicles to create mega-pools. Driven by economies of scale to access larger projects and reduce costs, 86 pension funds across England and Wales have combined to create six pooled funds. With these institutional investors traditionally being the main core money in the UK real estate market, this wide-scale pooling has generated the biggest structural shift seen in the investment sector for 25 years.
Pooled pension funds will impact the real estate investment market.
Assessing assets
While the strategies for the LGPS Pools are still evolving, the audit process to review their combined underlying holdings has been extensive in order to identify those that align with future strategies that they may continue to hold, as well as any crossover. The outcome of which will see the LGPS Pools redeeming from funds that don’t fit future objectives, manage legacy investments and establish a clear plan to meet performance targets.
The substantial amount of underlying pension fund money locked up in real estate, estimated at £33 billion at the end of 2023 by the IPF, that will be redirected over the next two to three years is significant for the market.
While many strategies are continuing to develop, it is likely that investments in smaller balanced open ended core UK real estate funds will be redeemed, leading to the eventual wind up of these funds. With reductions on the number of smaller funds expected, and a move towards larger scale funds, the lot sizes of real estate assets are anticipated to increase to an average of £40 million plus.
Alongside a balanced fund strategy, either directly managed by a Pool or outsourced to an investment manager, there are likely to be investments in more specialist strategies such as operational Real estate, living or potentially value-add opportunities.
The picture is of course still developing as the strategies for the Pools progress and become clearer. While some underlying pension funds still hold their own direct real estate portfolios with preferred managers, ultimately longer term it is expected that all assets will eventually pool.
Diversifying interests
Although each pooled fund will have its own competitive objectives, the underlying goal of the combined pooled fund is to diversify their respective investment strategies as well as access larger scale opportunities and drive cost efficiency. We have already seen requirements for larger lot sizes for example Aberdeen Investments on behalf of the Border to Coast Pool seeking larger properties or portfolios of scale.
Changing buyer profile
With the core institutional money now anticipated to be focussed on larger lots sizes, it does pose the question of who the buyers will be for smaller lot sizes. Opportunities are expected to emerge for other buyers for smaller lot sizes, particularly overseas capital or those that may not previously have been able to compete in this market.
There is no doubt that LGPS pooling has helped stabilise and provide a better understanding of UK core money. With a window of opportunity created from the appetite and equity of the pooled funds, the key will be unlocking the expectations between buyer and seller for larger ticket assets.
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