Prudential faces new competition from Legal & General inflation-hedging fund

Legal & General Property has taken on rival Prudential with the launch of the Limited Price Inflation Income Property Fund, aimed at defined benefit pension fund trustees. The fund offers property income designed to hedge inflation and match long-term pension scheme liabilities.

LGP head of property Bill Hughes said that L&G hopes to raise £50m-£100m from UK pension funds by an anticipated first closing next month. The eventual target size is £500m. The fund is the first of its type since the Secured Property Income Fund was launched two and a half years ago by M&G Investments, Prudential’s asset management arm.

“It makes sense for us to provide this product as we are the UK’s largest manager of pension schemes,” Hughes said. Parent company Legal & General Investment Management, which is working with LGP on the fund, has 2,000 segregated pension fund clients. The LPI Income Property Fund will buy UK assets with long leases that deliver annual inflation-linked uplifts from corporate, national and local government tenants.

The ungeared fund aims to provide an annual 4% real yield after inflation, compared with the 1.5% investors could expect from index-linked gilts and bonds. The fund will be managed by Derek Gilby, manager of LGP’s linked pensions property fund. Michael Barrie, LGP’s director of balanced funds, said: “The yield gap between inflation-linked property and equivalent index-linked gilts still offers a very attractive opportunity to our investors. “It may be some while before UK rents recover and many investors will prefer an income stream that rises with inflation over one that is linked to the underlying occupier market.”

Hughes said buying property at initial 4% yields with the certainty of annual 0-5% uplifts would bring compelling returns. Finding property let to top-quality tenants is not easy, but he said LGP would look to restructuring existing leases as well as at sale-and-leaseback deals. “There are takers out there for sale and leasebacks,” he said. LGP plans to launch more new funds imminently, including a UK recovery fund.