Q&A: The Local Authorities’ Property Fund

Michael Quicke, chief executive of CCLA, explains the development of the Local Authorities’ Property Fund which reached £500m in October this year.

Q: How quickly has the fund reached £500m?

If we go back four years, the fund was pretty stable at under £100m and wasn’t really rising. The increase has really happened over the past couple of years.

Q: What do you think has driven the rapid increase in the fund’s size?

It relates to a whole series of things. After years of very low interest rates, as a recent Room151 survey identified, councils are keen to diversify their investments, partly because they feel less secure with traditional counterparties and partly because they felt they were historically under – diversified.

Property is a well understood asset with high and predictable income. A small investment in property can make a big difference to the overall yield on their funds.

The LAPF has a strong governance regime, a good performance track record, and some accounting advantages compared with other investments.

The Local Authorities (Capital Finance and Accounting) (Amendment) (England) Regulations 2010 exempts an investment in the LAPF investments from being capital expenditure. This means that they can benefit from the LAPF’s income without having to reflect capital value changes until the investment is sold.

Q: How many councils are now invested in the LAPF?

There are 125 investors using the fund – investments ranging from £25,000 to £30m. There are 12 county councils, five London borough councils, 24 borough councils, eight City councils, and 22 district councils, 32 town councils, and 22 other local authority investors. Everybody gets the same return, with a single class of share. It has proved attractive across the board because all councils have the same proportionate pressure on their resources.

Q: How does the governance of the fund work?

The governance of the LAPF is controlled by the local authority sector. The trustee – the Local Authorities Mutual Investment Trust (LAMIT) – is also a shareholder in CCLA and appoints a non- executive director to our Board.

Every quarter we make presentations to the LAMIT council, and they hold us to account in our management of the fund.

They bring their knowledge of the needs and concerns of local authorities which helps us in the way that we manage the fund.

Some fund managers have not covered themselves in glory in the way they have managed investments for clients. Being owned by our investors means that this is hard coded into the way that CCLA operates.

Q: You mentioned the performance of the fund – what are the figures on that?

The most up to date figures we have are for the 12 months to the end of September. We compare the performance of the fund against the IPD Other Balanced Property Fund Index. During the most recent period the LAPF produced a return – covering income and capital – of 15.2%, compared to an index average of 14.8%. If we look at the past three years, there was a compound return of 13.2% compared to 11.8% for the index.

Q: How is the property portfolio of the fund made up?

The fund holds over 40 properties spread geographically and over different sectors. The largest sector by capital value is offices, which make up 45.1%, followed by offices in the South East but outside London make up 21.3%. In third place, industrials outside the South East of England, which make up 18%.

We restrict the maximum size of any property to 10% of the total fund value, and are asset-driven looking for really good properties that we can work in the future. We are looking to actively manage the fund holdings to enhance returns.

Q: What is the state of the property market at the moment and are there any clouds on the horizon which could affect the fund?

To start with, property is a long-term investment where the principle component of return is the rental income. The value of property, particularly outside of London, is still below the peak of 2007, despite recent improvements. Recently, we have seen capital values enhanced by reductions in yield, but as the economy improves, rent increases are likely to take over as the main driver of returns.

Q: What about the risk arising from properties becoming vacant?

That goes to the nature of the properties we acquire. We are keen to buy good, well positioned properties and consider that more important than the length of the lease.

If you buy a property in a bad location with a long term tenant, if they go bust then you have an empty property that is difficult to fill. Buying good, well positioned properties with relatively short leases means that we can get them cheaply and don’t have to wait as long to enhance the value.

A testimony to the quality of the assets held is that the void rate is 3.1%, compared with one of over 10% for the sector as a whole.

Q: Is there a limit to how big the fund can get?

There is a limit but we are a long way from that. We are not a large property fund. LAPF has gone from being a small property fund to a medium sized property fund. The major constraint will be whether we can continue to find attractive properties to buy that will deliver the returns investors require. On this, it’s important to remember that as the fund grows so the range of opportunities grows too in that larger properties become potential investments.

Photo (cropped): Oatsy40, Flickr.