A critical link: Inflation is a more important consideration for real estate investments in this low bond yield environment
Low bond rates and unpredictable equity markets combine to make the role of a pension scheme trustee or pension fund adviser a difficult one, particularly given the demands for more predictable but higher income. The search for alternative sources of income has led to a heightened interest in assets such as real estate that can provide some inflation/liability-linking characteristics.
In the United Kingdom, according to data from IPD, real estate has a long-term historic income return of 6.5 percent per year on average (for the 40-year period from 1971 to 2011) and has had a correlation with inflation of 77 percent, against 45 percent for equities and 27 percent for government bonds (for the 20-year period from 1991 to 2011). These attributes make real estate a potentially attractive option for pension funds.
Through a dedicated and actively managed strategy, it is possible to further enhance the link with liabili