Government calls for LGPS investment in new homes
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The Woodwise development, Manchester
The government has reiterated its desire to see Local Government Pension Scheme pools step up their investment in infrastructure, making explicit for the first time that it counts housing within the category.
Former chancellor George Osborne announced, in 2015, the plan to force LGPS funds to pool investments to create a small number of “wealth funds” to boost infrastructure investment.
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And in this week’s housing white paper, ministers made it clear that funds should look at housing schemes as a way of contributing to the UK’s need to boost the supply of new homes.
The paper said: “We want institutional investors to invest more widely in housing, including shared ownership.
“Pension schemes are increasingly regarding housing as an appropriate investment. The pooling of local government pension funds will increase opportunities for their assets to be used to support infrastructure projects, including housing.
“This could generate promising returns for scheme members while maintaining value for money for national and local taxpayers.”
The government also recommitted to measures designed to increase institutional investment in large-scale private rental sector (PRS) schemes.
It said: “These developments tend to be built out more quickly, adopt modern methods of construction and help regenerate local economies by attracting a skilled labour force.”
David Walker, head of LGPS investments at pensions adviser Hymans Robertson, said that interest in the sector is growing, although most investments are likely to be through a third party.
He told Room151: “The lack of product historically has been a barrier, but this is changing in big cities and there are plenty of case studies to demonstrate how this works.
“There are now a handful of fund managers with residential — mainly private rented sector — funds, or propositions such as club deals, available who have built up expertise in this area.
“It may be possible that the pools can do this themselves at some stage in the future but it is a specialist area so they would have to resource up to do it well and the specialist nature of the market means this might be difficult to find the required resource — otherwise there could be too much leakage.”
The government’s housing white paper
Walker said that historically, one of the big challenges for LGPS funds to investing in the housing sector has been the maintenance of a sufficient distribution yield: “Management costs have been high resulting in a big loss from gross to net”.
He said: “Buying purpose-built to-rent properties should reduce this leakage.”
In the white paper, the government also committed to ensuring that tenancies of three or more years are available, “for those tenants that want them on schemes that benefit from our changes”.
It said that it is working with the British Property Federation and National Housing Federation to consolidate this approach across the sector.
Steve Partridge, executive director of finance and investment at housing investment consultancy QSH, said: “There could be some resistance from some investors towards rent regulation.
“On the other hand, for the bigger institutions, if you have fixed-term tenancies with fixed indexation, it would increase certainty.
“It would increase the stability of their income stream.”
One LGPS fund which has already invested in housing is the Greater Manchester Pension Fund (GMPF).
In partnership with Manchester City Council and the Homes and Communities Agency, it has created Matrix Homes, a vehicle which has already delivered more than 250 homes for rent and sale.
Tom Harrington, senior investments manager (public markets) at GMPF, told Room151: “Under a purely commercial model, many of these homes arguably wouldn’t have been built as two of the sites are unlikely to have been commercially viable.
“However, by packaging the three sites together the overall scheme was a sound investment and delivers strong regular cash flow and strong collateral through security on property.
“Pension funds like the GMPF could well be part of the solution to the nation’s housing crisis.”
