Housing: A ‘good’ investment for pension funds?

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Developing and buying homes has become interesting for pension funds thanks to steady cash flows and inflation protection. How is pension fund investment in housing, including social housing, developing, and what are the potential challenges? 
In the UK, the need for housing is acute, and demand is therefore strong. On top of strong demand, cash flow and earnings or inflation-linkage make it just the asset a pension funds should want. 
However, UK pension funds have so far only dipped their toes into residential property investment. Many of those who have are local authority funds, such as the Greater Manchester Pension Fund, as well as the pension funds of Lancashire, the West Midlands and others. 

Is there a reputational risk? 

Unlike funds in Britain, their counterparts in central Europe have been busily buying and building homes for decades and increasingly since QE – sometimes beyond demand, or to the extent that tenants can see themselves pushed out of their homes to make room for higher yielding developments. A group of Zurich residents is now planning to take legal action against the Credit Suisse pension fund over just such a case, causing embarrassment to the fund and its parent company. 
Unwelcome regeneration projects are perhaps less of an issue in the UK, but the fundamental premise remains that pension funds are investors and pay pensions; as such, they need a return on their assets. How can this be balanced against the need of communities for stable, affordable rents? 
In the depths of austerity, central government has been advocating pension fund investment in housing; a 2012 government 'Review of the barriers to institutional investment in private rented homes’ argued that “rents in the private rented sector have tended to rise roughly in line with real average earnings. This is widely seen as an excellent match for liabilities arising in pension funds.” 
Greater Manchester Pension Fund has been leading the way on residential property, investing in the private rented sector. The fund says calls for local investment became louder during the financial crisis; today, its property venture fund manages a portfolio of £750m, and GMPF also holds £300m in impact and legacy investments. A 2017 member report shows a 90% approval rate of the fund’s ambition to develop housing in the local area. 
But there is reputational risk that comes with investing locally. GMPF considers the risk to be mainly that it could be accused of forsaking returns by providing capital locally. To mitigate this, local investment is capped at 5% of the fund, up from 3%. Partner investors are sought, and separate branding for local investment funds has been created to give a commercial feel to things. 

How does social housing provide a return? 

While ‘commerciality’ is often a given in the private rented sector, the involvement of private investors is less self-explanatory when it comes to social housing. Rent increases are capped; social rents have actually fallen since 2015.  
GMPF has properties rented at market rates as well as ‘affordable’ housing; it does not have investments in social housing but continues to look at the sector. It wants to increase its overall exposure to housing including affordable housing as part of its impact portfolio, but also sees these investments as providing secure, long-term inflation-linked cash flows - just another part of mainstream portfolio construction. 
Despite social rents falling, some pension funds have been investing in housing association bonds, issued at around gilts plus 1.2% to gilts plus 1.5%. One of them is the Co-op pension fund, which in 2018 said it plans to put £50m into social housing investment, saying it provides “attractive, secure inflation-linked income”. 
John Butler, finance policy leader at the National Housing Federation, explains that housing associations are now essentially diversified enterprises. Apart from providing housing at sub-market rents, they build properties for sale and provide shared ownership homes. 

The sales from new builds provide capital receipts, as well as rental income at market rates on the portion of any shared properties that has not been bought. Through these proceeds, housing associations can service their debt from private capital providers. 
Private investment in the social housing sector might not find everyone’s approval, but with the government largely pulling out of the area “it is necessary,” says Butler. Today, the government provides only around 20% of funding through grants, these having been cut back drastically in the 2010 emergency budget.
Piers Williamson, chief executive of The Housing Finance Corporation, said around four-fifths of the private capital raised by housing associations comes from banks; he believes the proportion provided by pension funds to be “minute”, though he notes that buyout providers have been investing in the sector for some time.  
Pension Insurance Corporation announced last week that it had completed a second £40m long-dated, senior secured private debt investment with a housing association that provides affordable rent and shared ownership, having initially invested £40m in 2018. PIC claims the investments “demonstrate an increasing trend within the social housing sector of building long-term relationships with institutional investors”. 
Announcements such as these raise questions over terminology, as social housing is used to describe affordable rent and shared ownership, rather than socially rented housing. 
More importantly, the question arises if social housing could also be affected by private investment activity where housing associations provide a mix of housing. 

So far, the involvement of private investors and their need for return has not affected social rent levels; former chancellor George Osborne granted rent cuts of 1% a year over four years from 2015. But the government has confirmed that from April 2020, providers can raise social rents by up to 1% above inflation (CPI) per year.  
Whether housing associations will see themselves under pressure to raise social rents by the maximum level if they want to continue to raise capital in the market remains to be seen; what seems clear is that pension funds will need to tread carefully in future if they want to include these investments in their impact or ESG portfolios. 

What is your view on pension funds investing in the private rented sector, affordable housing and social housing? 

Karen Shackleton
Sally Bridgeland
Mike Jensen
Phil Triggs

Paul Guilliotti