Long-term capital meets long-term purpose: The future of UK long-income real estate

Long-income real estate is quietly evolving. Once seen as a niche for liability-matching investors, it’s now emerging as a strategic tool for urban regeneration, impact-driven capital deployment, and alignment with the four structural megatrends we believe will underpin long-term asset value and growth: demographics, deglobalisation, decarbonisation, and digitisation.

We believe current market conditions offer a compelling entry point for long-income, broadening its appeal beyond traditional Defined Benefit schemes to include Defined Contribution pension schemes.

Structuring for Impact

Long-income equity structures allow investment-grade entities, including public bodies and corporates, to leverage their covenant strength to secure long, inflation-linked leases. The structure can enable the initial rent to be reduced below market levels, benefiting occupiers committed to the long-term use of bespoke, mission-critical premises. 

This model has proven effective in catalysing regeneration. Cardiff’s Central Square, revitalised by L&G’s £1bn investment, is a prime example of patient capital unlocking mixed-use development with lasting social impact.

At a time when investor appetite for social impact is growing – 96% say this will be equally or more important in the next 3–5 years1 – long-income is well placed to meet this demand.

Alignment with structural megatrends

In the early 2010s, long-income focused on more traditional sectors. Today, it’s increasingly aligned with megatrends shaping long-term performance:

Demographics:

An ageing UK population is driving demand for complex healthcare services. Long-income may be able to support the development of hospital extensions, specialist healthcare facilities and associated adjacent infrastructure like car parks to meet this need. It can also facilitate development of affordable and key-worker housing by partnering with local authorities, housing associations, and NHS Trusts to structure large-scale schemes.

Deglobalisation:

Supply chain shocks, from Brexit to Covid and geopolitical tensions, have accelerated onshoring. This has driven large corporates such as Nike* to seek bespoke distribution hubs in the UK, using long-income structures to secure mission-critical assets.

Decarbonisation & Digitisation:

The dual challenge of decarbonising and scaling power for AI demands significant capital. Long-income can help fund the infrastructure needed to meet these goals, from energy generation to data centres.

Market opportunity

UK commercial property values are around 21% below their mid-2022 peak. Long-income has traditionally priced with most modest net initial yields due to its lower-risk profile. This relationship has recently inverted, however, as longer duration cashflows have been negatively impacted by the steepening of the gilt-yield curve over 2025, reflecting the sector’s sensitivity to interest rates. Long-income now exhibits a higher net initial yield than the MSCI Universe, despite its unchanged risk profile. 

This inflection point presents, in our opinion, a rare opportunity to invest before the sector reverts to its traditional pricing dynamics, as we believe it will.

Income growth and resilience

It’s our view that rental growth will be a key driver of medium-term returns if inflation continues to run ahead of the target rate. Long-income’s inflation-linked leases provide growing income streams, although structuring will need careful consideration given the recent proposal to ban upward only rent reviews, with resilience provided by the high-quality nature of the occupiers. When capitalised in a stable yield environment, combined with the rebased income yield and adjusting for obsolescence, we expect long-income to outperform PMA’s medium-term forecast for All Property.

Pension schemes and long-income: A natural fit

UK pension reforms and the Mansion House Accord’s 10% private markets target unlock significant capital. Long-income offers a route to deliver tangible UK impact while aligning with megatrends that drive returns.

Corporate Defined Benefit schemes, especially those running on rather than moving to buy out, and Local Government Pension Schemes remain core investors, but Defined Contribution schemes are increasingly recognising long-income’s ability to provide diversification and resilience as part of a wider private markets allocation, particularly in uncertain economic climates.

We believe long-income is no longer just a defensive play. It’s a strategic lever for delivering financial performance and societal benefit.

1Source: pwc Emerging Trends in Real Estate Europe, December 2024

 

Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Past performance is not a guide to the future. 

*For illustrative purposes only. The above does not constitute a recommendation to buy or sell any security.