If you own real-estate leases in which the rent is linked to inflation, the UK pension fund industry wants your number. A shortage of other sources of inflation-linked income has left funds struggling to comply with the 2004 Pensions Act, which requires the industry to inflation-proof its pensions – and real-estate developers are increasingly taking advantage. In some cases, large pension funds have bought property outright, purely to gain exposure to real income (in other words, income streams which at least match the rate of inflation) but it is more common for banks to act as match-makers: sourcing inflation from the real-estate sector, and passing the income to funds through swap transactions. The need is so severe that developers are in a strong position to negotiate better rates, bankers admit.
"There’s real competition among banks to find business of this kind," says David Slater, head of inflation trading for the UK with BNP Paribas in London "That competition really appeared in 2005 after a big increase in demand from funds wishing to cover their inflation-linked liabilities with inflation-bearing assets – banks pushed their real-estate finance teams to go out and uncover more inflation-linked leases.