The challenge facing local government pension schemes is no longer simply about maximising returns, but how to preserve funding gains, generate resilient cashflows and support long-term pension obligations, all while supporting UK productive finance in the UK. Aviva Investors fund manager Renos Booth says Real Estate Long Income has much to offer.
Read this article to understand:
- Why schemes should consider allocating to Real Estate Long Income (RELI)
- Why RELI should be seen as a hybrid asset class, sharing characteristics with both traditional real estate and fixed income
- How it can help the transition from surplus creation to sustainable income and support productive investment in the UK economy
The funding position of Local Government Pension Schemes (LGPS) in England and Wales has improved significantly in recent years, driven by higher long-term gilt yields and strong investment returns. Compared with the previous triennial valuation, the average funding level rose 15 percentage points to 122 per cent of liabilities in 2025.1
That enabled funds to reduce average primary rate contributions, from 19.8 per cent of salaries in 2022, to 17.7 per cent in 2025, saving local authorities and participating employers millions.2
However, while their overall funding position may have improved, many funds are having to contend with cash outflows as investment income and new contributions fail to match payouts to a growing army of pensioners.
While they have the option to liquidate assets, the danger is they end up having to sell assets during a market downturn. The challenge therefore is how to maintain surpluses without relying on asset sales.
With most schemes still content to focus on growing their capital, they retain significant exposure to equities, which currently account for just under a half of all assets. Nonetheless, many have taken advantage of the improvement in their funding position to trim their allocations to public equities without fully de-risking into bonds.
Allocations to alternative asset classes, like infrastructure and private debt, have grown as schemes seek investments capable of delivering contractual income, inflation resilience and diversification from public markets.
Sustainable source of income
RELI offers a natural, perhaps sometimes underappreciated, alternative. It is essentially a hybrid type of asset that shares characteristics with both traditional property and fixed income.
Whereas traditional real estate is primarily about owning a building, long income is about owning a contractual cashflow secured against a building.
So rather than relying on what someone might pay for the asset in say five years’ time, the investment strategy involves securing long-duration contractual cashflows.
Leases are typically 15 to 25 years or longer; rental uplifts are fixed or inflation linked, and counterparties are strong corporate, public sector or quasi-public sector entities.
RELI comprises three distinct types of asset:
1) Reversionary long income, which is a traditional form of lease, where the investor retains ownership of the property.
2) Amortising long lease, also referred to as Income Strips, where contractual payments of 30 years or more progressively repay investor capital over the lease term, reducing exposure to future property market movements.
RELI offers an attractive way for schemes to make pensioner payments with reasonable certainty
3) Commercial ground rents, where contractual payments of 40 years or more represent a low proportion of net operating revenue . They tend to be linked to inflation.
The investment grade rating for commercial ground rents stems from typically low loan-to-value and high income cover.
When combined, these structures can help deliver the kind of secure and predictable income streams normally associated with fixed income, yet with a healthy pick-up in yields relative to gilts, whilst also providing inflation protection.
With contractual income streams spanning decades, RELI offers an attractive way for schemes to make pensioner payments with reasonable certainty – improving alignment between assets and liabilities – while continuing to grow their capital base.
Real returns
The fact RELI can help preserve the real value of those income streams – many leases incorporate inflation-linked reviews or fixed uplifts – only adds to its appeal in an environment of higher inflation uncertainty. With schemes’ liabilities often uncapped to inflation, it can aid liability-matching objectives.
Figure 1: RELI sits in a distinct space
With different return drivers to publicly traded bonds and equities, it can also offer meaningful diversification within a mature pension portfolio, all while potentially contributing to the scheme’s local investment ambitions.
When compared with traditional real estate investment, RELI can help dampen portfolio volatility and improve funding-level resilience
When compared with traditional real-estate investment, RELI can help dampen portfolio volatility and improve funding-level resilience. That is because returns tend to be less volatile as they are predominantly driven by income rather than short-term market movements.
A safe haven
Traditionally, RELI funds have been regarded as a safer form of investing than conventional real estate and have historically tended to offer correspondingly lower yields. That RELI is considered safer than traditional real estate is down to several factors. For instance, the cash flows from rents based on long-term leases tend to be highly secure and predictable.
For example, long-lease funds often invest in properties with tenants tied into leases of 20 years or longer. That is more than three times the tenure of leases found in a typical conventional real-estate fund.
Furthermore, they will only invest in properties let out to tenants believed to be at very low risk of default. These tend to be public-sector entities such as local authorities, NHS hospitals and universities. Where they invest in properties leased to private-sector entities, they are usually large “blue-chip” companies with an investment-grade (IG) credit rating.
Typically, a large majority of expected returns from RELI-type investments come from rents. That contrasts with conventional real-estate investments where managers aim to generate at least half of their return, and sometimes significantly more, by buying properties cheaply and selling them on for a profit.
Yet, as Figure 2 shows, since 2022 net initial yields for RELI have been higher than for the broader real estate market. This contrasts with the situation that prevailed for much of the previous decade and a half.
Figure 2: Long income net initial yields now exceed broad real estate
Past performance is not a reliable indicator of future results.
Source: MSCI UK Quarterly Property Index, MSCI Long Lease Funds in the UK Quarterly Property Fund Index, ICE BofA 5+ Year UK Inflation-Linked Gilt Index. Data as of Q2 2026.
With yields having risen sharply in recent years, RELI not only looks attractive relative to other real estate, but relative to a range of other forms of private debt too. For LGPS investors able to tolerate some illiquidity, the opportunity to lock in these cash flows looks compelling.
Figure 3: RELI indicative spreads are typically higher than other private debt sectors
Past performance is not a reliable indicator of future results.
Source: Aviva Investors, analysis based on ICE BofAML GBP Corporate index data. As at 20 July 2026. Indicative spreads over swaps (GBP SONIA). Public Corporates represents All Non-Financial Corporates (NFC) 25th to 75th percentile and median (dot) spreads. Note: long income based on amortising assets and sectors are not maturity matched.
Non-financial benefits
Alongside its financial characteristics, RELI can provide long-term capital for assets that support regional growth and locally identified priorities. Where underlying assets are located within an administering authority’s or pool’s defined geography and align with local priorities, RELI may also contribute to local investment objectives.
That may involve helping to finance urban regeneration, critical infrastructure and broader place-based investment opportunities.
As an example, Aviva Investors in 2023 invested in a major regeneration project in Digbeth, Birmingham. That has turned a former Typhoo tea factory, which had lain derelict for almost half a century, into a modern mixed-use development with a BBC production facility and broadcast centre at its heart. Partly by acting as a magnet for creative industries, the project is expected to benefit the local economy through the regeneration of the property and the wider area, and the creation of numerous jobs.
RELI also has the potential to assist those investors looking to achieve various sustainability goals. Environmental considerations often play an important role in investment decisions, even when mandates do not contain a formal net-zero objective.
For instance, the managers of Aviva Investor’s RELI strategies have over the past decade cut exposure to less energy-efficient buildings and modernised others, reducing exposure to buildings threatened by climate change.
The new development in Birmingham is a case in point. The developers aim to create Birmingham’s first net-zero building, with an “intelligent” roof that harvests rainwater and generates solar power, as well as managing heat build-up.
RELI funds have long been an attractive asset class for private sector defined-benefit pension funds looking to enhance income generation in a low-risk way.
As the funding position of LGPS improves, their focus is naturally turning towards protecting surpluses and improving income certainty. Offering a combination of attractive levels of contractual income, inflation protection, diversification benefits and real-asset security, RELI appears well placed to help schemes navigate the transition from surplus creation to sustainable income generation.
