11 April 2019

Why Local Government Pensions schemes should invest in BTR

Have you allocated 3% to housing?

Dan Batterton, Head of Build to Rent, LGIM Real Assets

With long-term, inflation-linked income streams, investments in traditional real estate, such as retail and offices, have been commonplace for Local Government Pension Schemes (LGPS). As investors look to further diversify their portfolios, however, there has been an increasing shift towards alternative options which share the same return characteristics.  With more pressure on local authorities to invest in sectors which positively impact their constituents, there is also an increasing move towards social impact investments which can help reshape local communities.

Against this backdrop, Natalie Elphicke’s 2015 Government report recommended that 3% of LGPS allocations be invested in local housing projects, helping to tackle the UK’s chronic housing crisis. However, until recently, the fragmented nature of the market made it an unappealing investment for institutions. Despite a structural shift towards renting in the UK, DCLG estimates that 70% of privately rented homes are owned by landlords with fewer than 10 properties. This means the sector has been unable to offer the required scale to attract investors whilst portfolios have been composed of ‘Build for Sale’ homes, not designed with residents in mind. The Build To Rent (BTR) sector is changing this.

The rise of elective renters and the lack of appropriate housing created the need for a new approach. BTR schemes now taking shape are large purpose-built developments with ancillary services, offering long-term, family friendly leases which provide security and flexibility. Schemes are also designed to be sustainable, aiming to reduce carbon impact and improved insulation, water and efficiency. With the benefit of economies of scale, developments also include a variety of facilities, such as gyms, resident lounges and commercial premises, often open to the public, ensuring that local people benefit and fostering a sense of civic loyalty within the community.  

BTR is making a powerful contribution towards delivering more UK homes. Homes England estimates that England needs 300,000 new homes per year to meet demand. The 2017 Housing White Paper acknowledged that institutionally held BTR can have a significant role in reaching these targets, whilst the Letwin Review called for a mix of tenures to address the housing crisis.

Not only ticking the social value box, the risk/return profile and income focus makes BTR a perfect match for LGPS. High occupancy rates, huge diversity and long leases mean income streams are stable, and often linked to price indices. This helps meet long-term liabilities, whilst providing a hedge against inflation. It also offers important diversification benefits from more cyclical investments in the wider commercial property market.  

No longer seen as a budding alternative, the BTR market is maturing with a robust track record. Since launching three years ago, Legal & General’s BTR Fund has committed over £1.2bn to the sector. With a number of LGPS already invested into it, Legal & General now has 3,700 new homes in the pipeline across the UK, providing housing in areas which really need it.

Today’s BTR schemes are demonstrating the notable impact that these investments can have on local areas. Legal & General’s multi-award winning development, The Slate Yard, formed a central part of the £650m regeneration of Salford Central. A previously underutilised site across from Manchester city centre, it is now a dynamic new district offering quality homes in a central location and attracting local employment and blue-chip corporate tenants such as Magic Circle law firms.

As the housing crisis remains one of the most pressing issues facing the country, there is an increasing role for councils and their pension schemes to help provide quality, affordable rental accommodation at scale. Widely welcomed by Government, this can help local authorities pay their pensioners in the long term, whilst improving local communities, attracting new work force and helping to reshape local areas for the future.

Article Published by The MJ