£30bn UK long-income real estate market continues popularity among insurers

Written by Adam Cadle

24/08/2020

The UK long-income real estate market is now worth around £30bn and continues to grow rapidly, according to a new report, with pension schemes and insurers being the primary investors.

According to Alpha Real Capital (Alpha) commercial ground rents is the fastest growing segment of the long income real estate market. Over the past five years the sector has grown from virtually nothing to around £4bn in size. Around £1.5bn of new deals have been completed in 2019 alone.

This trend is expected to continue, with both supply and demand increasing going forward

Alpha partner and head of long income Hugo James said: “What originally started as predominantly a long lease market dominated by sale & leaseback transactions has now expanded into other structures with commercial ground rents and income strips seeing significant inflows of capital in recent years. For investors, the choice of different structures provides flexibility to tailor the specific outcome that they are targeting in terms of yield, duration, income security and level of inflation protection, while for owners and acquirers of real estate it provides further options to optimise capital raising.

“We believe that the COVID-19 crisis will create more demand for commercial ground rents from tenants and that they will be the opportunity to achieve attractive returns for investors. This, coupled with the fact that the asset class has performed well so far during the pandemic will see more institutional investors looking to invest here.”

Alpha said, for investors, the key characteristics of a commercial ground rent investment are - very long duration: a typical duration of the cashflows is 30 to 40 years. In addition there is the added element of inflation protection, investment grade quality cashflows, illiquidity premia, enhanced diversification and gilt spread.

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