Pension funds poised to help social housing crisis

In 2015, the government, under former prime minister David Cameron, pledged to build 300,000 homes a year, but according to a January 2021 parliamentary report, supply has consistently fallen significantly short of this target.

Between 2012 and 2020, the supply of council housing and housing association homes at affordable social rents fell by almost 210,000 in England, according to the Chartered Institute of Housing’s annual UK Housing Review 2021.

The National Housing Federation estimates that the government would need to spend £14.6bn a year for the next decade to meet social housing demand through grants.

The demand for these assets has increased considerably over the course of the Covid-19 pandemic, and the resource available within the government/local councils has reduced. This increases the need for external resources more than ever

Annabel West, Redington

The pandemic has slowed the supply of affordable social housing. The CIH review found that in the first half of 2020-21, just 10,531 affordable homes of all types were started under grant-funded programmes, compared with 17,980 for the equivalent period in 2019-20.

In addition, the current government has pledged to mobilise tens of billions to build out green infrastructure. PwC has estimated that the UK would need to increase infrastructure spending to £40bn a year, double its current level, to reach its goal of net-zero carbon emissions by 2050.

It is clear these sectors desperately require an injection of capital and expertise.

Pension funds takeover

As the government has not met its pledges, pension funds have the potential to take over the housing sector and revitalise it.

Annabel West, manager research associate at Redington, says there are many benefits to investors operating everyday services such as social housing instead of the government.

“As with many essential services, there are advantages in outsourcing for the scale and expertise of external parties, given the resources available to the UK government,” she explains.

Under an investor operating model, West notes that pension funds can “increase the supply of housing” and “minimise the social care burden for local councils”.

She says: “Firstly, social housing and infrastructure managers are able to employ a highly experienced team, with backgrounds in development, housing associations and fund management who can ensure these properties are best in class and maximise satisfaction for their tenants.

“Furthermore, investment managers can utilise their deep network of resources when developing assets to ensure they place high-quality assets in the most advantageous locations for the local authorities and tenants.”

From a financial perspective, West stresses social housing assets have a “demonstrable track record” over the past five years and have delivered consistent returns for investors.

“The demand for these assets has increased considerably over the course of the Covid-19 pandemic, and the resource available within the government/local councils has reduced. This increases the need for external resources more than ever,” she adds.

Local Government Pension Scheme funds have been among the most active investors in social housing assets in recent years.

In March 2021, the Cambridgeshire and Northamptonshire LGPS funds invested almost £100m in a new fund from M&G aimed at financing affordable homes.

US-based PGIM launched an affordable housing fund in February, raising £190m from local authority pension asset pools, including Northern LGPS and the Brunel Pension Partnership.

“The fund is intent on encouraging better practices, both environmentally and socially, in a housing sector where provision has historically been fragmented and left totally to local authorities and housing associations,” says Vanessa Jacka, investment principal at Brunel.

She adds that social housing “is an area where the LGPS can provide long-term support while achieving appropriate investment returns”.

However, investors need to be aware of the risks involved in social housing or infrastructure allocations.

As well as low liquidity, which can hamper schemes looking to unwind positions, West also cites vacancy risk — no tenants means no rental income — and counterparty risk, which relates to the partnerships essential to constructing and maintaining housing complexes.

Encouraging investors

West argues that defined contribution schemes are “well aligned” to invest in infrastructure, given their demographics and a need for long-term growth.

Despite this, very few schemes have made allocations to the asset class — largely due to the requirement for daily liquidity.

“Relaxing DC regulations would encourage the adoption of infrastructure investments,” West says.

In May, the Financial Conduct Authority launched a consultation on a new type of investment vehicle, the long-term asset fund, designed to make it easier for DC schemes to invest in illiquid assets.

In addition, the government is pushing institutional investors to increase their allocations to domestic infrastructure to aid the country’s recovery from the pandemic.

However, Andrew Thornton, chief execuitve of Principal Real Estate Europe, warns that investors and governments must be careful to ensure policies “remain workable” for the long term.

“It will be more difficult to persuade private capital to enter new markets in future if there is a perceived risk that government policy may change during the lifetime of an investment,” he says.

Thornton adds that the growing importance of environmental, social and governance issues and impact investing, as well as changing residential demands and working habits brought about by new technology and the pandemic, means the opportunity has never been greater to take a radical and collaborative approach.

He says: “To really solve the problem, all players — and those across the political spectrum — will need to leave their preconceived prejudices, solutions and economic interests behind, think creatively, and be prepared to take some risks.”