Scheme to create first UK residential property portfolio

The £790m London Borough of Islington scheme is tendering for “an investment of circa £10m-£20m... in residential real estate”.

Until now, residential property has been a turn off for schemes because the relatively low price per unit makes it hard to find sufficient numbers of properties to buy in sums typically spent on institutional allocations. However, steadily high returns are starting to attract interest.

The mandate will be for a portfolio of homes from across the UK and western Europe, but some will be local to the borough, with a view to “help remove barriers such as the very high deposits now required from first time buyers, or the lack of capital resources available for housing association developments”.

It is intended as a growth asset, but managers taking part will have to show they can gain income from the allocation too.

Some pooled institutional property funds contain homes within their wider portfolios, but Islington believes this is the first segregated mandate – a view backed by managers and analysts.

Mark Weedon, head of UK residential at property investment index providers IPD, said: “The Islington Council pension scheme’s decision to launch a purely residential fund is the first of its kind, but not surprising given the investment performance delivered by UK residential compared with other asset classes in recent times.”

According to IPD figures, UK residential has delivered total returns of almost 10 per cent year on year over the decade to the end of 2011, with 9.3 per cent for inner London, including Islington.

Richard Tanner, UK managing director of AEW Europe, which has about £14.5bn property assets under management, added: “I’ve not seen residential property purchased directly by a pension scheme, although it makes more sense to leave the allocation to a manager as one of a number of property assets within the fund.”

Islington Council’s Deputy Leader and executive member for finance, Cllr Richard Greening, said: “The returns from investment in equities over the past 10 years have been disappointing, but residential property prices in London and the south have continued to rise in spite of the recession. We are therefore looking for ways to invest pension fund resources in this sector.

“If this proves to be a success, we hope it will lead to a much higher level of investment from Islington’s pension fund and other pension funds, which could then have a significant beneficial impact on housing supply in London and the south, and help to stimulate economic growth.”

Islington Council pension scheme was 78 per cent funded at the time of its last valuation in March 2010.

Download PW's The Specialist: Property & Infrastructure Supplement 2012 for more on this subject.