Wandsworth eyes private rents as London CIV preps for launch

Despite the inflation protection and diversification benefits offered by the asset class, pension funds have previously shown reticence to the private rented area of the real estate market due to concerns such as illiquidity and the potential reputational risks associated with being a landlord.

The London collective investment vehicle – whereby several boroughs in the capital have joined forces to save on costs and gain economies of scale – is due to launch in the summer. And Wandsworth, a leading player in the CIV, said some of the “disadvantages” associated with the PRS could be overcome by investing collectively.

The asset class offers potential to the pension fund to increase returns compared to bonds, to introduce inflation protection and increase diversification in the portfolio

Wandsworth Borough Council

In a pensions committee note in May by the finance director Chris Buss, it recommended the committee “approve that further work is undertaken through the London CIV to develop a suitable vehicle for investment [in the PRS]”.

It said: “This asset class offers unique opportunities and the London CIV would provide scale to any investment”, which it added would lead to lower costs and increased liquidity.

Committee members were sent a report on the asset class by consultancy Mercer, which detailed the investment rationale, performance and future demand.

The committee note stated: “The asset class offers potential to the pension fund to increase returns compared to bonds, to introduce inflation protection and increase diversification in the portfolio.”

However Wandsworth said any continued work on the PRS should be subject to “the fundamental attractiveness not being altered by external constraints”, adding that regulation, such as rent controls, could make the investment less viable.

Matthew Abbott, senior real estate researcher at Mercer, said the PRS is less correlated to other subsectors of real estate, is lower risk than commercial property and is likely to be boosted further by population growth.

He said that while the vacancy rate for commercial real estate is around 10 per cent, over the long term this figure is closer to 2-3 per cent for residential, creating a good income opportunity for pension funds.

However, Abbott said the scale of such projects and the time involved in developing the assets could be a barrier.

“It needs people to lay bricks, and laying bricks takes a long time,” he said.  

Abbott added there was a misconception that residential is the most volatile sector of real estate “because it’s all over the papers”, but the office space market sees the greatest volatility.

He said he was aware of around 20 pension funds spanning the public and private sectors that were interested in the PRS, adding that the asset class could present “the biggest game-changer in decades”.

London CIV

Collective investing among local authority pension funds came under the spotlight last year following the Department for Communities and Local Government’s consultation on cutting costs and improving efficiency.

Many objected to suggestions that such schemes should be forced to invest collectively into passive investments.

The London CIV, which 32 boroughs have signed up to, is one example of non-mandatory scheme collaboration and is due to launch this summer after it receives authorisation from the Financial Conduct Authority.

Karen Shackleton, senior adviser at consultancy AllenbridgeEpic, said the initiative had received a lot of support.

She said: “When London Councils approached the London boroughs for additional capital last year, I understand there was some resistance from some of them about paying across those extra amounts… [but] despite some grumbling about additional funding, I think there is still fundamental support for this initiative.”

In Wandsworth’s May CIV update, it said it was imperative the various boroughs be able to sign off on the transition of investment mandates into the vehicle “otherwise there is a real possibility that the CIV launch will be delayed, thereby reducing the immediate benefits to the boroughs”.

As a result, Wandsworth is proposing to delegate to the finance director the authority to settle any contracts concerned with the CIV on behalf of the pension fund.