After falling out of favour following the 2022 UK mini-budget crisis, real estate long income is making something of a comeback. Fund managers Renos Booth and Kris McPhail explain why it is starting to attract interest from a variety of investors.
Read this article to understand:
- Why a diverse range of institutional investors are being attracted back to real estate long income.
- Why this asset class provides an attractive alternative to gilts.
- Why this type of investment may align to other objectives of institutional investors
Defined-benefit (DB) pension schemes had for a long time been natural investors in Real Estate Long Income (RELI), a strategy that targets properties with long-term lease agreements.
Among RELI’s key attractions was an ability to deliver secure and predictable income streams, in many cases linked to inflation, and a healthy pick-up in yields relative to gilts. With comparatively low levels of volatility versus traditional real-estate funds, the asset class was seen as a useful tool to help schemes manage their liabilities.
But all this changed in September 2022. The unprecedented sell-off in gilts that followed the ill-fated mini-budget announcement that month left schemes scrambling to sell assets as they looked to generate liquidity. RELI funds were caught up in the storm.
Even after UK financial markets had begun to stabilise, the improvement in DB schemes’ funding position meant they went on selling out of less liquid assets. In some instances, this was driven by a natural desire to de-risk portfolios after they were scarred by what happened to gilts in 2022.
In other cases, it was a prelude to concluding a bulk-purchase annuity, which passes the primary risks of running a DB scheme to an insurer. Many insurance companies were unwilling to acquire these assets as part of such a transaction.
Supply and demand imbalance
This structural shift in the market has led to an imbalance between supply and demand, which continues to be reflected in depressed prices in the secondary market. For instance, secondary market transactions in Aviva Investors’ Lime Property Fund historically tended to take place at a premium of around five per cent to the fund’s net asset value. This covered various costs when investing new money, such as stamp duty charges, agency and legal costs. But by 2022 positions were changing hands at discounts of ten per cent or more.
Figure 1: Lime Property Fund secondary unit trade pricing, premium/discount (per cent)
Source: Aviva Investors. Data as of June 30, 2025.
While Figure 1 shows the size of secondary market discounts has begun to shrink, RELI assets arguably remain oversold, especially relative to more conventional forms of real-estate investments.
Traditionally, RELI funds have been regarded as a safer form of investing than conventional real estate and have tended to offer correspondingly lower yields. Yet, as Figure 2 shows, since 2022 net initial yields have been appreciably higher. This contrasts with the situation that prevailed for most of the previous decade and a half.
Figure 2: Long income funds versus all funds (MSCI Qtly Index) (per cent)
Past performance is not a reliable indicator of future returns.
Source: Aviva Investors, MSCI UK Quarterly Property Index. Data as of June 30, 2025.
That RELI is considered more resilient than traditional real estate stems from several factors. For instance, RELI funds tend to offer secure and predictable cashflows from rents based on long-term leases. For example, the Lime Property fund invests in properties with tenants tied into leases of 20 years or longer. That is more than three times the average lease length typically found in conventional real estate funds.
In addition, the fund focuses on properties leased to tenants we assess as having a low risk of default. These are typically public sector entities such as local authorities, NHS hospitals and universities. Where the fund does invest in properties leased to private-sector entities, these are generally large, well-established companies with investment-grade (IG) credit ratings.
The fund focuses on properties leased to tenants we assess as having a low risk of default
Historic data suggests that during previous recessions sub-IG counterparties are significantly more likely to default than their IG counterparts. Since its launch in 2004, the fund has not had any tenants default or had to restructure any of its leases.
The emphasis on secure income streams means that around 75 per cent of expected returns from RELI-type investments are derived from rental income. This contrasts with conventional real-estate investments where managers tend to aim to generate at least half of their return, and sometimes significantly more, by buying properties cheaply and selling them on for a profit.
Additionally, most leases include provisions for rental uplifts meaning RELI funds provide a degree of inflation protection too. This feature can be particularly attractive to investors with inflation-linked liabilities.
Signs of recovery
History suggests the current window of opportunity will not remain open indefinitely. This is particularly relevant with interest rates now trending down and given asset values have already fallen substantially due to the sharp rise in gilt yields since 2022.
Figure 3 shows that over the past two decades the Lime fund has delivered consistently higher returns than gilts with notably lower volatility.
Figure 3: Attractive low volatile returns versus gilts (basis points)
Past performance is not a reliable indicator of future returns.
Note: The graph shows compounded quarterly total return figures. Fund performance is shown net of fees. UK Gilt Benchmark constructed of an equally weighted combination of the FTSE 5-15 Years Gilt Index and the FTSE 15 Years+ Gilt Index.
Source: Aviva Investors. Data as of June 30, 2025.
When constructing a strategic asset allocation, we believe RELI funds can play a valuable role for investors within a bucket of income-generating assets, particularly as an alternative to fixed income. This framing makes their historical outperformance relative to gilts especially relevant.
Broader impact
In addition to financial characteristics, RELI funds may align with broader institutional priorities. For example, at a time when investors are being encouraged to support the domestic economy, these funds can provide exposure to UK-based regeneration projects. The Lime Property Fund has recently committed capital to a major redevelopment in Digbeth, Birmingham, transforming a long-derelict site into a mixed-use development anchored by a new BBC production facility. The project is expected to support local employment and attract creative industries to the area.
RELI strategies may support investors with sustainability objectives
RELI strategies may also support investors with sustainability objectives. While the Lime Property Fund does not have a formal net-zero mandate, environmental considerations are embedded in its investment process. Over the past decade, the fund has reduced exposure to less energy-efficient buildings and upgraded others, resulting in a portfolio that is better positioned to manage climate-related risks.
The Digbeth development is a case in point. It aims to be Birmingham’s first net-zero building, featuring an intelligent roof designed to harvest rainwater, generate solar power, and regulate heat. These design features reflect a growing emphasis on environmental performance in real estate development.
Looking ahead
While RELI funds such as the Lime Property Fund may have fallen out of favour with some corporate DB schemes in recent years, there are signs the tide is beginning to turn. While the deep discounts seen in 2023 may no longer be commonplace, investors are still finding opportunities to invest at what we believe are attractive valuations, particularly where secondary market transactions are occurring below NAV.
RELI funds continue to offer a range of features that make them compelling in the current environment
The fund’s investor base has continued to diversify. Demand has come from a broad range of investors, most notably local government pension schemes and corporate DB schemes who are in “run on”.
Beyond pricing, RELI funds continue to offer a range of features that make them compelling in the current environment. As interest rates trend downward and markets stabilise, we expect demand to strengthen further, especially as investors move beyond the volatility of 2022 and refocus on long-term income and capital preservation.
