Institutional investors are longing for long-income property, with its apparent low risks and high yields.
Since the global financial crisis, the decline in bond yields has left institutional investors seeking alternative secure income-generating assets. Certain forms of real estate such as ground leases and properties with long leases fit the bill, and they are often labelled long-income property or LIP. Long-income property is real estate let on long leases (more than 15 years) to creditworthy tenants. The leases have inflation-linked rent reviews, providing inflation protection to the rental income received and the underlying value.
This investment type is higher yielding than bonds, but less risky than traditional real estate. LIP offers the opportunity for a significant yield pick-up over government and corporate bonds, with comparable credit quality. It suits investors such as defined-benefit pension schemes and life assurance companies because they can use the long-dated inflation-linked cash flow streams to match their liabilities.
LIP aims to provide returns that are less volatile than those of traditional real estate, thanks to having lower letting risk and lower reliance on residual values when a lease terminates. The tenants in a LIP strategy are often government offices, supermarkets, universities and hotels (especially budget hotels).