South Yorkshire Pension Authority invests £80m in local region

The Sheffield City Region Joint European Support for Sustainable Investment in City Areas fund has been allocated £80m in loans by SYPA.

The SCR Jessica fund, managed by real estate investment firm CBRE, was initially established in 2013 with £22m of investments by the authority into the SCR, and has so far deployed £25.5m of capital into the Yorkshire city.

The SYPA’s £80m allocation is its second round of investment in the urban development fund, which has £20m of debt available to lend and hopes to provide more than £300m of capital to the region.

Separately, the SYPA has invested £25m in residential and socially orientated properties in the region with St Bride’s Managers. The local authority fund originally invested in the St Bride’s White Rose Partnership, which invests in property across Yorkshire – including offices and hotels in the south of the county – but has recently agreed an extension focusing solely on the residential market.

Local and social impact investments make up a small but important part of the SYPA’s portfolio. The Local Government Pension Scheme member’s 25 per cent stake in the original White Rose Partnership fund amounts to just £12.9m, and its most recent £80m and £25m investments equate to 1.25 per cent of the scheme’s total assets.

The plan also holds other assets with some local element or impact, such as a private equity investment targeting the north of England, but does not class these as local investments.

George Graham, fund director at SYPA, says: “As a local authority pension fund, we have a strong connection to our locality, and if we can achieve the same returns at an appropriate level of risk through a local investment we will always consider it. However, local investments will only ever be a relatively small part of the overall fund in order to maintain an appropriate level of diversification.”

According to the latest SYPA annual report and accounts, the fund owns a number of properties in the UK collectively valued at around £650m. The diversified portfolio consists of commercial and residential properties.

LGPS property investments are increasing

SYPA’s move comes at a time when members across the LGPS are increasing their residential property investments.

Barry McKay, associate and fund actuary at Barnett Waddingham, says: “The demand for residential property has outstripped supply for some time now, and so this asset class could provide strong returns while providing an element of diversification from other commercial or balanced property portfolios for pension funds, and from other growth assets generally.

“While usually considered more as an exclusionary element, investment in social and affordable housing represents an opportunity to benefit from a scheme’s socially responsible investment focus.”

Mr McKay adds that for the typically more mature schemes found in the private sector in the UK, these type of investments can provide much-needed income to meet members’ benefits.

While usually considered more as an exclusionary element, investment in social and affordable housing represents an opportunity to benefit from a scheme’s socially responsible investment focus

Barry McKay, Barnett Waddingham

Ian Houston, a partner at St Bride’s Managers, says that Yorkshire’s housing situation is typical of the UK: “In terms of the new residential partnership, the shortfall in housing across the UK is replicated across the Yorkshire and Humber region.

“We believe South Yorkshire has good, long-term prospects provided that investment in the region is combined with good knowledge of the local market.”

He adds: “Brexit jitters aside, there is still robust demand for both commercial and residential assets in the region.”

Responsible and impact investing in local areas

Different types of responsible investing are often confused and conflated, and Karen Shackleton, founder of Pensions for Purpose and senior adviser at MJ Hudson Allenbridge, says it is important to clear up the labelling of investments.

“Most pension funds today, especially the LGPS, would describe themselves as responsible investors,” she says. 

“Just because it is a local investment does not make it an impact investment. It could be that [SYPA] found a local investment that offers a great return and, because they know the areas, they are probably able to do their due diligence to a greater level than perhaps other local authorities would be able to.”

But Ms Shackleton says some pension funds are now moving further along the responsible investing spectrum, towards impact investing. 

“This is where the fund allocates to an investment that is delivering a financial return and intentionally tries to have a positive impact return, which is measured and reported on,” she explains.

She adds that the Global Impact Investing Network 2018 survey has measured the performance of impact investments and “91 per cent delivered to financial expectations”.

Last month Pensions Expert reported that among pensions and insurance impact investors, fund managers said theme or sector-focused investment products saw the most increased interest.

Ms Shackleton says she does not believe there is a performance drag with either impact investing or responsible investing in general.

Trustees need to handle impact investment with care

However, careful consideration is still needed before making an allocation.

Ralph McClelland, a partner at law firm Sackers, says: “Trustees need to handle impact investment strategies with care.”

He explains that trustees need to focus on the purpose for which they hold their investment power, as this is the essential feature of their fiduciary duty.

Mr McClelland also highlights that trustees should take care to ensure they have gone through a proper process and have acted prudently for the right reasons.   

“This is particularly the case in relation to impact funds, which are prepared to subordinate their investment objective to their social objective and therefore potentially perform less well than a fund without the social aspect,” he says.