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November 25, 2012 10:36 pm
A north London council is using its employees’ pension savings to support the supply of new homes, in a decision that is believed to be a first for the UK.
The £20m investment by Islington council’s pension fund, will be welcomed by the coalition government, which has called on pension schemes to stimulate economic growth through their investments.
“Building new homes is one of the things that can most directly stimulate growth,” said Richard Greening, Islington council’s executive member for finance, who oversees the pension fund.
“We hope to encourage other [pension] funds to come into the arena, and begin to address the crisis in affordable housing,” he added.
Islington will place 2.5 per cent of its £800m pension pot in the UK’s only regulated residential property fund, which was set up by Hearthstone Investments this year.
The fund aims to buy new or recently built homes across the country, with about half in London and the southeast.
The private rented sector has grown from 2.5m households to 4.8m in the past decade according to Savills, the estate agent, with more low-income households using housing benefit to subsidise their rent in the private sector.
The government is keen to encourage social landlords such as councils and housing associations to branch out into the private rented sector, as a way of boosting standards, while Boris Johnson, the mayor of London, has called on local government pension schemes to invest in new homes to address the shortage of housing in the capital.
The Greater Manchester Pension Fund is working on a pilot plan to fund construction of 240 homes on land owned by Manchester City council.
The Hearthstone fund allows investors to avoid property sales and management, and to redeem investments at three months’ notice.
However, analysts have warned that local authorities are still reluctant to invest pension funds in residential property.
“Pension fund trustees are very concerned about any perception of conflicts of interest,” said Paul Hackett, director of the Smith Institute think-tank, which published a report into infrastructure investing by council pension funds.
“Our report should serve as a wake-up call to government – ministers have huge aspirations, but some of their expectations are just silly,” Mr Hackett added.
Other pension fund managers note that smaller local government schemes, that rely on external consultants, may not be able to make niche investments in residential property or infrastructure.
“Small pension funds may not have the capacity to research individual investment opportunities, and if funds don’t exist, consultants can’t recommend them,” said Mike Taylor, chief executive of the London Pensions Fund Authority.
A final concern is returns. Most pension funds aim for returns of 7-8 per cent a year to cover inflation-linked obligations to retirees, Mr Taylor said.
The Hearthstone fund is aiming for returns of about 4 per cent a year from rental income, and capital gains from UK house price rises, which it estimates will reach 5 per cent a year by 2017.
Savills forecasts house prices will rise by 4 per cent a year through to 2020.
Yet, while such investments are attracting discussion among local authority pension schemes, according to the Smith Institute study, fund managers appear sceptical about calls from George Osborne, the chancellor, for them to invest in large domestic infrastructure projects.
Mr Greening said: “With infrastructure you have to be careful because there is a concentration of risk if you invest in one or two large projects.
“You would have to invest across a large number of projects to diversify that risk, which would mean a large number of funds investing together, and there is no sign of that.”
Mr Taylor said: “The chancellor can ask us to invest in infrastructure all he wants, but if there are no funds offering the returns we need, we can’t.”
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