Lothian: Social housing returns too low to invest

Social housing has been held up as an alternative source of the index-linked returns desired by pension funds to hedge their inflation risk, but Clare Scott told delegates the level of returns were not high enough to invest.

“Real returns and positive correlations are definitely there, but it is not as big as what we would be looking for,” she told delegates. “We are looking for around 3 per cent return and [social housing] doesn’t deliver this.

“We are also concerned [whether] returns would truly be inflation linked if inflation is high for a prolonged period.”

Scott also cited pressure on social housing from the government’s welfare reform, limited diversification and potential reputational risks as reasons for not yet making a commitment to the asset class.

Phil Redding, managing director of institutional business development at Aviva Investors, said pension schemes should be looking at social housing due to the long-term, inflation-linked cash flow that can be used to match liabilities.

“We are looking at yields of 2-2.5 per cent for social housing,” said Redding.

These cash flows are also very secure because the critical shortage in social housing supply means there is low turnover and vacancies in properties, he added.

“This is also a very heavily regulated sector,” he told delegates. “The homes and communities agency oversees the sector and [has] powers to move in when they see something could be of detriment to the plan. And out of the 1,700 housing associations we have only seen two that have hit trouble.”