Key Takeaways
- • Local Government Pension Scheme (LGPS) funds in England and Wales have consolidated 86 pension funds into six pooled funds over the last decade, creating what the article describes as the biggest structural shift in the UK investment sector in 25 years.
- • The IPF estimated approximately £33 billion of underlying pension fund money was locked up in real estate at the end of 2023, to be redirected over the next two to three years.
- • Smaller balanced open-ended core UK real estate funds are likely to be redeemed and eventually wound up, with average lot sizes expected to rise to £40 million or more.
- • Aberdeen Investments, on behalf of the Border to Coast Pool, is already seeking larger properties or portfolios of scale, signaling the shift toward larger tickets.
- • Overseas capital and buyers previously unable to compete may emerge for smaller lot sizes as core institutional money concentrates on larger assets.
Summary
According to Savills Guernsey, writing in Green Street News, large-scale pooling of pension funds across England and Wales has reshaped UK real estate investment over the past ten years. Driven by economies of scale, access to larger projects and lower costs, 86 Local Government Pension Scheme funds have combined into six pooled vehicles. Because institutional investors have traditionally been the main core capital in the UK real estate market, the article characterizes this consolidation as the most significant structural change in the sector in 25 years.
The pools have conducted an extensive audit of their combined underlying holdings to identify assets that align with future strategies. The process is expected to result in pools redeeming from funds that do not fit their objectives, managing legacy investments and setting clear plans to meet performance targets. The Investment Property Forum (IPF) estimated underlying pension fund real estate exposure at £33 billion at the end of 2023, money that is expected to be redirected over the next two to three years.
Smaller balanced open-ended core UK real estate funds are likely to see redemptions and eventual wind-up, while the number of smaller funds is expected to decline in favour of larger vehicles. Average lot sizes are anticipated to rise to £40 million or more. Alongside balanced strategies, whether managed directly by a pool or outsourced to an investment manager, pools are likely to allocate to specialist segments such as operational real estate, living sectors and potentially value-add opportunities. The article notes that some underlying pension funds still hold direct portfolios with preferred managers, but over the longer term all assets are expected to pool.
Each pool has its own competitive objectives, but the common goal is diversification, access to larger-scale opportunities and cost efficiency. Aberdeen Investments, on behalf of the Border to Coast Pool, is already seeking larger properties or portfolios of scale. This raises the question of who will buy smaller lots as core institutional capital moves up the size curve. The article expects opportunities to emerge for overseas capital and other buyers that previously could not compete in this segment. The author concludes that LGPS pooling has helped stabilise and improve understanding of UK core capital, and that the key challenge will be aligning buyer and seller price expectations for larger-ticket assets.
The pools have conducted an extensive audit of their combined underlying holdings to identify assets that align with future strategies. The process is expected to result in pools redeeming from funds that do not fit their objectives, managing legacy investments and setting clear plans to meet performance targets. The Investment Property Forum (IPF) estimated underlying pension fund real estate exposure at £33 billion at the end of 2023, money that is expected to be redirected over the next two to three years.
Smaller balanced open-ended core UK real estate funds are likely to see redemptions and eventual wind-up, while the number of smaller funds is expected to decline in favour of larger vehicles. Average lot sizes are anticipated to rise to £40 million or more. Alongside balanced strategies, whether managed directly by a pool or outsourced to an investment manager, pools are likely to allocate to specialist segments such as operational real estate, living sectors and potentially value-add opportunities. The article notes that some underlying pension funds still hold direct portfolios with preferred managers, but over the longer term all assets are expected to pool.
Each pool has its own competitive objectives, but the common goal is diversification, access to larger-scale opportunities and cost efficiency. Aberdeen Investments, on behalf of the Border to Coast Pool, is already seeking larger properties or portfolios of scale. This raises the question of who will buy smaller lots as core institutional capital moves up the size curve. The article expects opportunities to emerge for overseas capital and other buyers that previously could not compete in this segment. The author concludes that LGPS pooling has helped stabilise and improve understanding of UK core capital, and that the key challenge will be aligning buyer and seller price expectations for larger-ticket assets.
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