The £4.9bn Nottinghamshire County Council Pension Fund has increased its commitment to local property investment. The fund has added £10m to its local property fund and has expanded the geographical area where it will invest.
The scheme has recently invested alongside a number of other Local Government Pension Scheme schemes in the Hearthstone Residential Fund 1. The five schemes have together contributed £100m towards investment in residential property.
The scheme’s local property fund grows to £30m from £20m in size. It is currently invested in four properties in the Nottinghamshire area, including two retail industrial units and a car park.
What we’ve tried to do is to look at newer properties, slightly higher value, so we have less by number
Keith Palframan, Nottinghamshire County Council Pension Fund
As a member of the LGPS Central pool, the fund will now examine property investment opportunities across this zone. The scheme’s local property fund is managed by Aberdeen Asset Management, which raised the opportunity to broaden Nottinghamshire’s property investment horizons with the fund.
Keith Palframan, group manager of finance at the fund, said: “We took a view that we’d like to put a bit more money in, and also, because of pooling mainly, perhaps expand the geographical area as [Aberdeen Asset Management] were struggling to find the opportunities within purely Nottinghamshire that met our requirements.”
The scheme has revised its investment criteria for local property investment over the past few years.
“What we’ve tried to do is to look at newer properties, slightly higher value, so we have less by number,” Palframan said. “Previously we had quite a lot of smaller value properties… what we want to do is try to reduce the transaction costs,” he added.
Find the balance between knowledge and risk
Schemes looking to invest in local property have the choice of direct and pooled property investing. Amanda Burdge, principal investment consultant at Quantum Advisory, sees merits in both strategies.
“It’s a balance to be struck, between the local knowledge that you have, and the concentration of risk that you are potentially taking on,” she said.
“Through a pooled fund you will get access to potentially larger properties [and] a wider, more diversified portfolio. Also, you have better liquidity within those [funds],” Burdge added.
Schemes may instead look to leverage their expertise in the local area. “If you invest directly, then you potentially could achieve a better deal,” Burdge said.
LGPS funds will invest beyond their boundaries
Local government pooling arrangements must be finalised by April 2018 this year. The initiative was launched in 2015 by then-chancellor George Osborne.
Steve Simkins, a partner in consultancy KPMG’s pensions practice, predicts that LGPS property and infrastructure investment will go in two directions, and continue to back projects at national and local level. Pooling may particularly enhance the latter.
“The first is that assets will be pooled into national level to invest in large national infrastructure projects – energy, water, and the like. Secondly, that local funds will consider holding some of their assets back in order to invest in their local investments,” he said.
“In between that, you may see the pools taking up direct private investment funds, which look at local projects primarily across the region of their pool, but not necessarily exclusively restricted to the pooling region,” he added.
Schemes could help fix the housing crisis
Local property investment can provide LGPS funds with steady revenue streams and inflation protection. Communities have benefitted from much-needed public sector investment during a period of government spending cuts.
James Duncan, partner at law firm Winckworth Sherwood, said that LGPS funds may find a role to play in resolving the UK’s relative lack of affordable housing while meeting their investment objectives.
As a result of the housing crisis, “there is now a market for institutional investment in long-term housing developments”, he said.
“If the local authority pension funds maintain a return over a very long period of time as a result of the assets they invest in… [with] an inflation-backed return, well that’s a happy coincidence,” he added.
Investment performance represents the main legal risk to schemes looking to invest in local property, according to Duncan.
Greater Manchester impact investment to build 2,000 homes
In October, the £21.3bn Greater Manchester Pension Fund was in the latter stages of concluding a series of impact investment deals, worth about £100m, to build roughly 2,000 local homes.
“If it’s an investment which is going to sit there and guard against inflation, and obviously have the characteristics of a risk-adjusted return, and has, from a portfolio point of view, diversification benefits, well then there is no legal risk,” he said.
“Now, of course, it is very difficult to find a risk-free investment,” Duncan added.
