UK – Islington Council's pension fund has made an initial investment in housing, one of the first local authority schemes to do so.

The £20m (€25m) allocation to a vehicle run by Hearthstone comes after the London borough previously expressed an interest in Mill Group's Investors in Housing fund, but was unable to agree details surrounding its loan facility.

After short-listing three managers out of nine applicants, the council selected the TM Hearthstone UK Residential Property fund.

It currently invests in London and the south east of England, targeting a net rental income of 4% and a growth of 5% by 2017.

It has attracted £37.5m in seed capital.

Commenting on the appointment, Islington councillor Richard Greening said the decision to invest had been based on a "careful analysis" of the council's options.

"It reflects our view that investment in this sector will produce good long-term returns for local taxpayers and the members of our pension fund," he said.

Greening added that he looked forward to other pension funds investing with Hearthstone, prompting a "mass movement" that would increase the supply of new housing in the UK.

Christopher Down, chief executive of Hearthstone, said he was pleased with the council's "landmark" investment.

"Recent government and media attention has highlighted the opportunity for local government pension funds to play a role in the delivery of housing, a stable long-term investment that can support social objectives while delivering diversification to multi-asset portfolios," he said.

As of the end of March, Islington's £810m fund invests £92m in property through mandates managed by Aviva, Threadneedle and Franklin Templeton.

Aviva and Threadneedle's mandates, comprising all but £4.7m of the fund's exposure at the time, returned 7% and 6.2%, respectively.

The fund said Franklin Templeton's mandate was too new to report its performance.

The commitment by Islington comes after the Future Homes Commission, convened by the Royal Institute of British Architects, called for the launch of a £10bn housing fund backed by local authority pension schemes.

In September, one of the country's largest local authority schemes, the Greater Manchester Pension Fund, confirmed it would help with the construction of 240 homes in Manchester by committing £25m in funding.