Investing into land lease structures: An alternative for index linked bonds

  • Dimitar Dimitrov Dimitar Dimitrov

Index linked bonds attached to Dutch inflation have been a subject of interest for pension funds in The Netherlands for a long time. Such bonds are very convenient to protect the pension funds’ clients from long term inflation risks; however, the Dutch government’s reluctance to issue the above mentioned financial instruments forces the country’s pension industry to look for alternatives.Land lease structures are already common in The Netherlands and the risk return structure of these financial contracts resembles the one of government issued bonds. This is our motivation to research whether land lease structures in which the land rent payments arelinked to inflation can be an alternative for indexed bonds.We used past data to create Dutch indexed bonds and inflation linked land lease structures as if they existed before in The Netherlands. The risk and return results of the historical analysis showed that inflation linked land lease structures can be an alternative to inflation linked bonds. The observation of legal and tax issues leads us to the same conclusion.The results of our research add more empirical validity to the idea that land lease structures can be an alternative for index linked bonds and can give more confidence to the newly developing market for inflation linked land leases.Our work also has some interesting implications. The data on land prices observed and the current behavior of land lease markets gives us ideas for a product which, while it is not an alternative for an indexed bonds, can be a subject of interest for pension funds.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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