40 min read 30 Oct 19
Summary: Assets that produce predictable income are becoming ever more valuable for many long-term institutional investors in a world of low interest rates and volatile markets.
In particular, demand is growing among pension schemes for secure, long-dated cashflows that can help hedge long-term liabilities and so enable them to meet their commitments to pensioners.
Investments that can offer a profile of returns to meet these needs are scarce and often expensive. Long lease real estate, where a real estate freehold is sold by its owner-occupier and leased back on a long-dated lease that can run for decades, can offer an attractive solution.
Sale and leaseback transactions have a long history but have come into focus in the past two decades as a source of attractive, inflation-linked returns well suited to institutional investors such as life insurers and pension schemes.
While sale and leasebacks are probably the most familiar type of long lease real estate asset, a number of variations on this model also exist. Income strips and ground rents similarly combine real estate ownership with long-dated leases to provide the buyer of a freehold with long-dated, secure and inflation-protected income.
However, there are important differences between the three asset types and each can support different investment objectives. In this guide, we explore the features and characteristics of each of these types of long lease real estate, compare their outcomes for an institutional investor and look at the trends shaping the development of these assets.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.