Could the changes to pension rules lead to major changes to real estate investment- Bridget O’Connell reports
In last week’s Budget chancellor George Osborne announced the most far-reaching overhaul of the UK pensions system in almost 100 years.
The radical reform pulled out of the red box means pensioners now have the freedom to empty their pots at retirement, rather than being obliged to turn their pensions savings into an annual retirement income.
The question is, how will this effect the billions of pounds managed and invested into real estate by insurance behemoths such as Legal & General, Prudential’s M&G and Standard Life.
The market reacted quickly to the announcement, with almost £5bn immediately wiped off the value of shares in the firms that provide annuities – which convert an individual’s pension savings into an income for the rest of their life.
Those that suffered most were firms such as Partnership Life Assurance, which provides individual annuities and will be affected by the changes rather than bulk providers.
The changes Osborne announced, some of which came into effect on 27 March with more to follow in April 2015, will not affect the annuities “back book”, so any thoughts of forced sales can be dismissed.
British pension funds hold some £2trn. About 40% of that relates to defined-contribution pension schemes – the funds directly affected by the reforms.
Every year another £11bn or so flows into these schemes. It is this figure – and the proportion that is invested in real estate and indeed government infrastructure projects or social housing – that might be affected by the overhaul.
With City analysts calculating that between 70% and 90% of the annuities market will disappear as pensioners choose either to spend or to invest their savings elsewhere, it seems inevitable that this will have a knock-on effect on real estate investment.
Legal & General’s entire mostly bulk annuity book of business is around £35bn – of which less than 10% is real estate, for example. L&G chief executive Nigel Wilson moved quickly to quell any fears about long-term funding drying up. “We are still going to have a big appetite for investment in those projects,” he told the Sunday Times. “Nothing has changed.”
Legal & General Investment Management real estate boss Bill Hughes echoes this sentiment, arguing that lifting the requirement to buy an annuity “is not likely to be a sea change because the logic behind buying annuities remains intact.”
Standard Life real estate investment director Mark Meiklejon agrees. He says that what is taking place is a transfer of responsibility to retirees, who will now have to proactively allocate their own pension pot. This does not change the underlying need for a sustainable level of income – a need property can meet.
One testing point for property as an asset class is liquidity, although Meiklejon says from an end-investor’s perspective daily liquidity shouldn’t be necessary.
What might change, he suggests, is the shape of the investment product that meets pensioners needs, depending on supply and demand, but this is something that will evolve over time.
It is this opportunity that the commercial sector has seized upon – rather than concerns that pensioners will invest in the already overheating housing market as retirement investment sparks a fresh buy-to-let boom.
British Property Federation chief executive Liz Peace says: “Perhaps the most fundamental reform in the Budget that could impact on UK real estate is not an obvious one and will occur only over the long term. The radical reforms to pensions, particularly allowing people greater say over how their pension pot is spent, could have some impact on existing property-based annuity investments, and also create new opportunities for property-based investment products.”
Colliers International’s chief economist and forecaster, Walter Boettcher, agrees that the liberalisation of personal investment and pension vehicles, especially in relation to annuity requirements, has the potential to give rise to a whole new generation of investment products targeted to the evolving needs of future retirees.
He says: “Given Solvency II and other regulatory threats to existing pensions and insurance providers, the implications for property allocations are potentially large, if yet unknown. One possibility is a movement away from traditional pension fund investing and into direct small-scale private property investment. This also presents interesting possibilities for PRS and related schemes, and raises questions over home ownership in the UK.”
For those at the front line, however, scepticism remains. Shaun Gorvin, partner at GS Capital Advisors, says that although there may not be a huge impact on demand for short-let central London stock, the regions could suffer.
Fund managers are a leading force when it comes to forward-funding developments let on long leases with annual uplift to hotels or supermarkets, and Gorvin questions who would take their place.
“Common sense would dictate that there would be less demand for real estate delivering long-term income with inflation-linked uplifts,” he says. “This could have an effect on value and take some liquidity out of the market.”
Bridget.O’Connell@estatesgazette.com
