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Impact Investing

IPE special report May 2018

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Local government pension schemes 'best suited' to UK residential property

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UK - The UK's local authority pension funds offer the "best prospect" of attracting institutional investors into the residential property market, according to a report by the Institute for Public Policy Research (IPPR).

In a report looking at the lack of residential housing in the UK - 'Build now or pay later?' - the think tank argued that through "careful" product design, institutional investors may be enticed into the sector, although it admitted the perception of it as a high-hassle and low-yield asset needed to be overcome.

The UK has long stood apart from European institutional investors in not seeking exposure to residential properties, with Dutch and Swiss investors gaining between 40% and 60% of property exposure through the market.

Discussing the possibility of attracting overseas institutional investors, IPPR noted that the weak sterling exchange rate could be an incentive for investors.

However, it cited a roundtable discussion hosted by the UK Treasury last year that found investors would need to see "more evidence of investment in homes" before choosing to enter the market themselves.

"If there is to be substantial institutional investment, most of the money will have to come from domestic insurance and defined benefit pension funds," the report concluded.

It also said there was a need for "concerted" effort by consultants to create interest in the asset from what IPPR deemed "very conservative" UK trustees.

"Perhaps the best prospect for institutional investment in residential property is local authorities' pension funds," it said.

"These funds are sizeable, and the councillors who sit on their management boards understand the need for more housing better than most, as they hear first-hand experience of it from their constituents in their regular surgeries."

The report's authors added that, while the local authority schemes had to be cautious in their investing, they could also afford to be patient - having previously noted the problem posed by the asset's illiquidity.

IPPR cited interest by the London Borough of Newham in a co-investment with the Mill Group, as well as previous discussions that the London Pensions Fund Authority could invest £35m, as proof that the residential real estate sector was at least garnering the attention of local funds.

Consultancy Redington has been vocal in the past about the investment opportunities offered by the UK social housing sector, arguing its link to inflation made it an attractive asset for pension funds in the current environment.

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