State pension manager NEST tenders UK and global REIT mandates
The National Employment Savings Trust is looking to make its first stand-alone investments in real estate. NEST, set up in October as part of the UK government’s requirement for employers to provide workplace schemes, is tendering two mandates, for a direct UK property fund and a global REITs fund.
NEST now has 3% of its capital allocated to real estate. “Our current exposure to property is through a fund of funds managed by BlackRock,” said Paul Todd, NEST’s head of investment policy. “By having individual mandates we can exercise more control over how much we allocate to any particular risk premium.”
UK real estate fits with NEST’s investment objective to outperform inflation after all charges during the growth phase of its funds. Auto-enrolment means NEST will get many billions of assets under management quickly. It expects most members will not want to personally select their investments, but will leave the management to NEST’s ‘default” funds.
“In the next 20-30 years we think we will be one of the largest DC schemes in the UK and potentially in Europe,” said Todd. “The property allocation will be a lot higher than it is now. It will change over time, depending on economic circumstances and where we think the risks and opportunities are.
“We think it is a good asset class to capture some of that inflation risk. There are challenges in terms of liquidity, but our investment horizons are 30-40 years. “We think we can take advantage of some of that illiquidity risk premium that real estate has.
“We still expect daily valuations, but don’t need the liquidity absolute investors require. Because of our scale over time, we’re likely to be cash positive for many, many years, so we can rebalance – we have to sell infrequently.”
Providing the daily liquidity that DC schemes require is a challenge for real estate funds, Todd added. “We think there is sufficient product out there to provide what we need. That challenge is not insurmountable and to some extent, NEST’s arrival is helping generate interest and market innovation for DC.”
Real estate also provides a way for NEST to manage risk through diversification. “The global REIT mandate will help even more with the diversity and we wouldn’t have the same challenges in terms of liquidity and pricing,” Todd noted.
As well as its default funds, NEST offers members other choices, including an ethical fund. “A real estate product that can meet both our default and ethical fund needs would be very interesting,” said Todd. “If that is not possible we’d be very interested in a real estate fund matching our ethical criteria.”