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Institutional investors increasingly turn to long income European assets in diversified LDI strategy

Investors are building on the traditional liability driven investing (LDI) approach of a two-way split between liability hedging and return seeking assets, towards a more holistic view, including a third class of assets which are specifically focused on generating secure, long lasting income.

Alpha Real Capital, the specialist manager of long income real assets, says the increase in popularity of long income property is due to the fit within investors’ secure income portfolio, complementing shorter dated liquid credit, with longer dated illiquid exposures.

In the current low yielding and uncertain macro-economic environment, European Long Income Property, which includes ground rents, income strips and other long lease property, has the ability to generate secure, inflation-linked contractual income-based returns.

The assets are expected to provide a significant yield pick-up over government and corporate bonds and be more defensive through economic cycles than traditional real estate whilst also acting as a good diversifier.

Concurrently, acquirers and asset owners of European real estate are increasingly accepting long income property as an efficient way to release capital, benefitting from a permanent covenant-lite source of finance that reduces refinancing risk and can lower their weighted average cost of capital.

Alpha, which has deployed in excess of €1.6bn in commercial ground rents to date, believes it is crucial to understand what investors are trying to achieve and proactively originate opportunities to meet their requirements, whilst factoring in the long-term needs of asset owners.

Hugo James, Head of Long Income, Alpha Real Capital said:

“We believe the growing acceptance of Long Income Property as an efficient source of capital and an attractive funding source for owners of operating assets, is creating an exciting opportunity for institutional investors providing both diversification and income security.”

james.wallace@realassetmedia.com