Social housing for LGPS funds?

Time for blog two – this time, some thoughts on ‘local’ investment. As a topic, it does seem to be a no-brainer. I’m sure local authorities throughout the UK would love to see more social housing and inward business investment, development and support within their own geographic boundaries. Who co-ordinates and facilitates such activity – whether the main responsibility is with local or central government – is not knowledge that I possess, but additional housing and economic development must be very tempting options for administering authorities responsible for large multi-million pound pension funds which are always looking for new areas of investment.

Social housing is a subject that is close to my heart, since I grew up in it. Without it, I have no idea where my family would have lived. ‘Right to buy’ was a key policy of the Thatcher Government, tying in with the Conservatives free market approach, but the downside was a significant shortage in social housing stock, particularly the ‘good’ houses in the ‘nice’ areas.

According to the Communities and Local Government website, there were 1.8 million people on the housing waiting lists in England alone for 2011. Sobering stuff, brought more sharply into focus given that the traditional housing construction industry remains in the doldrums. So is there an opportunity here for LGPS funds?

Well there are a few steps worth considering before embarking on a ‘local’ route.

The first, in three related parts, is: what questions should be asked about the opportunity being considered, what is it going to deliver in terms of investment returns and where does it sit in the fund’s overall investment strategy? Unfortunately, how it might fit in to the wider social contract of the authority, and which parts of the administering authority’s geographic area will benefit are not key considerations – merely serendipitous outcomes.

The second is is which route do you take? Does a range of suitable investment products, in, say, social housing, exist? To my mind, the answer at the moment, sadly, is ‘no’ – but I’m always happy to be corrected. I’m certain that more LGPS funds would be interested in diversifying their investment strategies by adding something like social housing to the mix – as long as the investment returns are reasonable, and that it brings something new to the strategy in terms of risk reduction and/or return enhancement. One downside of social housing at the moment is that any current investment opportunities tend to be created for projects across the UK – which is good in terms of your diversification, but doesn’t tick the ‘local’ box.

The third is manager selection – a favourite topic of mine. All of the usual criteria apply when choosing an investment manager: quality of people involved, investment philosophy, and investment process being the main three. This, to my mind, has always been a sticking point in local regeneration and redevelopment. Opportunities that tend to crop up seem to be relatively small in scale and don’t justify the time required to run comprehensive due diligence.

At the end of the day, pensions have to be paid – but hopefully funding gaps will be closed more by investment returns in the coming years than by contributions. If local infrastructure, development or housing projects can help do that, as well as deliver for the greater good as a by-product, then options in this area shouldn’t be off the table. A clear and unconflicted process of appraisal and vetting is the solid foundation on which to consider such investment possibilities.

Oh, and not forgetting the need for the investment marketplace to come up with solutions that offer choice and allow making such investments a lot easier than it currently seems to be!