Chairs of Local Government Pension Scheme asset pools have stated their willingness to provide capital for housebuilding in the UK, but insisted any real estate investments will be viewed through a financial, rather than a political, lens.
Both local authorities and the government are under pressure to build more homes. At this year's Conservative Party conference, Prime Minister Theresa May announced that her government would remove the limit on how much councils can borrow against the value of their housing stock, a move intended to spur investment in homes.
In turn, pressure is being applied to the recently formed local authority pension pools, according to Denise Le Gal, chair of the Brunel Pension Partnership and a member of the LGPS scheme advisory board.
The question has to be – is this a good investment in the long term, and does it meet our criteria?
Denise Le Gal, Brunel Pension Partnership
She said the government sees housing as included in its definition of infrastructure. When George Osborne announced his intention to create the pools at the 2015 Budget, increased allocations to infrastructure were a key target of the policy.
“There’s a pressing need for housing across the country – in particular, affordable housing. And they want to see us doing what we can,” she said.
According to fact-checking charity Full Fact, 183,570 new homes were built in England in 2016-17, up from 163,940 in 2015-16. This is lower, however, than the 2007-08 level of 200,300.
Pools retain member focus
So far, pools have appeared willing to help the government with its ambitions, particularly when impact can be achieved in the local area.
Last year, the Greater Manchester Pension Fund laid out plans to fund roughly 2,000 homes through impact investment deals.
In July, London Borough of Barnet Pension Fund committee discussed the plausibility of investing the fund’s assets into local infrastructure.
However, LGPS members and their pools should base decisions on such projects primarily on the outcome for members, not their local community, according to Le Gal.
“Of course, we have to measure that against our fiduciary responsibility and we have to ensure that we get best value for money for our beneficiaries,” she said.
BPP’s own private markets portfolio prefers commercial property, although it has the option to diversify "by investing up to 30 per cent in overseas commercial property and/or UK residential property”, according to its website.
“Some councils have been criticised for investing in property outside their boundaries, and others are criticised for investing locally,” Le Gal said, adding that this criticism is “sometimes political”.
“The question has to be – is this a good investment in the long term, and does it meet our criteria?”
Housing investment should not be not political
The Local Pensions Partnership’s chairman Michael O’Higgins agreed that housebuilding could be an attractive opportunity, but rejected any notion that this would be done to serve political goals.
The partnership invests approximately 10 per cent in real estate and roughly another 10 per cent in other types of infrastructure, such as rail.
“We don’t do housing because of the political flavour of the day,” he said. “However, there is in my view a good investment case to be made for looking at housing as an area where we can get a solid return; plus potentially, if we still remain owner of the housing, there may be some capital upside in due course.”
“The difficulty is that the principle is easy to articulate, but making it happen – finding the developers, finding the land, putting the package together – is harder than it should be,” O’Higgins added.
Jill Whitehead, who chairs the London Borough of Sutton’s Pension Committee, said local housing investment could be feasible and could fit well with its environmental, social and governance objectives.
“At the end of the day we need to make sure that our investments bring enough funding for our pensioners, that’s the most important thing,” she said.
Sutton is currently funding housebuilding from its housing budget, Whitehead said. But local housing investment from LGPS funds is “something I think that London boroughs and other boroughs may want to look at in future,” she added.
Look nationally and locally
Barry McKay, an associate in consultancy Barnett Waddingham’s public sector team, said LGPS investment in housing offered funds excellent investment benefits, both nationally and locally. It can also fit well in an LGPS fund’s ESG strategy, he said.
Kent cuts passive equities for private equity and infra
The £6.2bn Kent County Council Superannuation Fund has moved capital from UK passive equities into private equity and infrastructure. The fund narrowly missed its benchmark for returns in the year to March 2018, after underperformance from equity and fixed income mandates.
“It provides a real return but there’s also diversification,” he said. “If you do nationally you get different geographical parts, and that therefore diversifies the risk of it, albeit things tend to follow London anyway.”
“Locally, funds will be more focused on possibly local parts of the pool as well, so they can bring in housing for the social reasons as well as the pension fund reasons.”
