LGPS pooling paves way for housing investments

Chris Rule, chief investment officer, Local Pensions Partnership

Local Government Pension Scheme (LGPS) pooling should enable more council pension funds to invest directly in residential property portfolios, according to the assistant executive director of Greater Manchester Pension Fund (GMPF).

Speaking at last week’s Housing and Regeneration Finance Summit, Paddy Dowdall explained how the GMPF is working towards financing the construction of 10,000 new homes over the next three years.

At the summit, organised by Room151 and publication Social Housing, Dowdall said that pooling could help smaller funds access the market.

He said: “There are 89 LGPS funds in England and Wales. Some of these funds manage below a billion pounds and the average is £3-£5bn. At that scale it’s difficult to have the size of internal teams necessary to drive this [investment in housing] forward.

“I think pooling can go some way to doing that, creating the capacity and capability. But it is early stages of pooling and the pools have a long way to go to solve the other investment issues they have.”

Dowdall said that healthy returns were available to funds and pools investing in residential property, “depending on the entry point”.

He said: “One of the features that helps housing investment and makes it attractive in the current environment is that it has a solid collateral base but also delivers an income that is rising.”

During his presentation, Dowdall highlighted the benefits of LGPS funds working in partnership with local authorities to deliver development schemes of large housing.

Describing the fund’s partnership with Manchester City Council, to deliver 244 homes on five sites, he said: “There was quite a clear meeting of needs and assets we could bring to the partnership.

“The city council had land and the pension fund had capital. Between us we had internal expertise and access to external expertise to manage this project in an environment of trust – which is clearly very important for long term joint ventures.”

Also speaking at the summit, Chris Rule, chief investment officer and managing director at LGPS pool Local Pensions Partnerships, said that market conditions meant development of housing was currently easier than trying to buy existing portfolios of housing.

He said: “We are prepared to develop but not particularly keen on taking unrewarded development risk – but we will build.

“The principle reason is that it is difficult to buy.

“Prices are very compressed, there are quite a lot of people looking to do the same thing and there aren’t that many secondary assets out there.

“To get the kind of returns we want to get over the long term we are finding more often than not we are looking at prospective projects where we are building the yield rather than buying the yield.”

Housing not only provides opportunities to diversify the pool’s investment portfolio, but enables stakeholders – council pension funds – to meet social aims.

However, he warned that the sector does have a number of risks stemming from demand, economic and political factors.

He said: “It isn’t a remarkably high level of return for the amount of risk you are taking. I would argue the risks in core infrastructure investment are very similar to housing.

“On average I am seeing a 200 or 300 basis points better return on infrastructure assets than a housing investment, so we have to pick carefully to find the opportunities in housing to warrant going in that direction, rather than putting the pension fund money into something that will get you a 300% improved basis points return on.

“Now don’t get me wrong – it is not easy to find those assets either.

“It is not all of one and none of the other the other, but just to make the point that it is not as easy as some hope it will be.”

Rule said that funds and pools interested in housing development could reduce their risks by taking a conservative approach to financing schemes.

Pointing to a scheme of 200 units funded by LPP, he said: “When we built it, there was no leverage applied. Now that it is 100% let and it has stabilised, we are looking at putting leverage onto that asset. That helps us boost the overall return.

“We built it conservatively from a financing point of view and then when it is stabilised think about leveraging it.”

Get the LGPS Quarterly Briefing