Future Homes Commission visit to a housing site under construction in Leicester © RIBA
A collective and ‘pooled’ approach Even the largest local authority pension funds lack the scale and expertise to be able to invest with confidence in local property developments. The average fund property portfolio has assets of only £115 million.39 The London Pensions Fund Authority (LPFA) and other pension funds consulted by the Commission made clear they would prefer to invest in a collective and independently-managed local authority property fund or funds. Indeed, one such fund with local authority representation on its board already exists — the Charities, Churches and Local Authorities (CCLA) Fund, with assets of over £5 billion.
So how do we make this happen? It is a question of leadership that needs to come from the sector and the Local Government Association (LGA) is starting to demonstrate this. The largest 15 local authority pension funds could pool 15% of their assets in an independently-managed Local Housing Development Fund to invest in developing sustainable, mixed-tenure communities including homes for rent. The LGA should work with their members to identify whether this would work, and how to go about doing it. The fund could be structured like existing private equity funds, owned by the investors and with a fixed-term life of 7-10 years. If the idea proves successful in generating returns in excess of 10% a year for the sponsors, a series of funds could be launched. In the first instance it would make sense to discuss the concept with the 15 largest local authority funds. They have a combined asset base of over £80 billion, of which some £4.6 billion is already invested in property in the UK or overseas — but not yet in UK residential property.40 If the trustees of these pension funds were convinced that a Local Housing Development Fund would deliver better risk-adjusted longer-term returns than are now in prospect
33_ Local Authority DB Pensions: Cash Flow Turning Negative, Greenwich Associates, Q3 2012 34_ Local Authority DB Pensions: Cash Flow Turning Negative, Greenwich Associates, Q3 2012 35_ See Reuters Fundview article published 25 August 2011 (http://uk.reuters.com/article/2011/08/25/ fundview-idUKL5E7JO26R20110825 ) Aviva want the funds to achieve 4.5-5% yields 36_ According to the IPF report quoted previously, only 1% of UK Institutional Property Portfolios are invested in residential property. There is no reason to believe local authority pension funds are any different 37_ Communities and Local Government Committee, Financing of new housing supply, Eleventh Report of Session 2010–12 Volume I, page 14 38_ Local Authority Pension Funds: investing for growth, The Smith Institute, September 2012 39_ £116.8 million according to Pension Fund Performance Guide using data reported 31st March 2011 40_ Pension Fund Performance Guide using data reported 31st March 2011