Is support for ground rent investments misguided? Are they even a good value, inflation-linked asset as some in the industry are claiming?
Right now there’s a lot of enthusiasm for ground rent investments. Some advisers are even encouraging pension fund trustees to consider them as a way of achieving inflation-linked returns.
The idea is that ground rent charges on properties will increase in line with inflation. While this may be true, these investments have common drawbacks that outweigh the inflation-linked benefits.
For a start, these investments tie up assets for the long term, without offering very high expected returns. By contrast, inflation swaps can provide protection against rising inflation without such a commitment. Pension fund trustees can then invest their remaining assets in more attractive, diversified or liquid investments for better returns.
We also question whether the ground rent market is of sufficient size to justify interest from pension funds. Right now the total capacity for institutional ground rent investments is only a few hundred million pounds a year. This is around 0.02% of the collective assets of UK corporate pension funds.
We would encourage anyone to invest in a wide range of asset types. However, there’s a very real danger of trustees buying into an attractive-sounding concept without considering whether it would be equally attractive in practice.