Barking and Dagenham plans social housing investment to hedge inflation

The £666.5m scheme’s pensions panel is considering social housing mandates proposed by its consultant, which will seek “to achieve returns of 2 to 3 per cent above index-linked gilt returns”, according to the minutes of its pensions panel on July 9.

“It’s just to get a link to inflation, so it would be part of our derisking strategy over the long term,” said David Dickinson, group manager of pensions and treasury at the council.

Schemes are showing increased interest in social housing investment to diversify away from traditional assets – however, investment can be time intensive and some schemes have questioned the true level of inflation-linkage.

The investment is also part of a bid to diversify away from equities and bonds, Dickinson said. 

It’s just to get a link to inflation so it would be part of our derisking strategy over the long term

David Dickinson, group manager of pensions and treasury

He said the scheme hoped it would deliver “a similar type of return as index-linked gilts but with a more stable asset base".

The £25m investment will most likely be raised via the scheme’s allocation to senior loans, once it matures, Dickinson said.

Once fully invested, social housing will account for around 3 per cent of its total asset allocation.

The scheme’s funding level was 71 per cent at March 31 2013, down from 75 per cent at the time of its previous valuation in 2010 and 88 per cent in 2007.

The benefits of investing in social housing are dependent on the role a scheme wants it to play in its portfolio. For example, it is unlikely to deliver equity-like returns, said Nick Spencer, director of alternatives at Russell Investments.

“For other schemes that are looking for more balance and ways to diversify from their equity exposure, then it has potential in that role,” he said.

Spencer said investment in social housing had garnered more interest from schemes since 2008 to 2009 as “there’s been a reinvigoration in their real estate portfolios”.

Greg Fedorenko, associate in consultancy Redington’s manager research practice, said the most common way to invest is through debt issued by the housing providers. 

However some schemes have raised issues around how investment in the asset class sits with their responsibility to provide housing.

“If you are a local authority and you are investing in social housing debt, there ultimately has to come a point [where] if you're a bond holder, in order for that landlord to safeguard its job to pay to you as the lender, it's going to have to evict people if they don't pay the rent,” said Fedorenko.

He said when making these types of investments, investors should consider the liquidity they are giving up.

Lothian Pension Fund previously said it had held off investing in social housing due to doubts over the level of inflation-linked returns offered by the asset class, the fund’s service manager told the National Association of Pension Funds' 2013 investment conference.

Schemes can also invest directly. However, Fedorenko said the risk with accessing social housing this way is that the value of the investment will fluctuate with the value of the property.

“For a pension scheme it might not offer a perfect match with your own set of pension liabilities because your pension liabilities are going to change in line with rates and inflation,” he said.