The Greater Manchester Pension Fund (GMPF), the UK’s largest local pension fund, is investing £30 billion in affordable housing, with 30 percent of its 10 percent allocated to real estate set to benefit the residential sector.
The fund has just invested £120 million in a Legal and General fund that will invest in purpose-built social housing and shared ownership housing (where people buy part of a home and pay rent on the rest), which GMPF deputy director Paddy Dowdall says offer compelling, low-risk, inflation-indexed income streams with measurable impact.
The allocation comes alongside previous investments in the “small” affordable rent sector, where rents target 30 percent of the tenant’s income and which has similar properties but is not part of the regulated sector.
GMPF worked with L&G to shape the allocation, inventory composition and pricing. “We wanted to make sure it was right for us,” says Dowdall.
A chronic housing shortage in the UK has led to long waiting lists for social housing and young people being unable to afford home ownership. Dowdall believes the sector will attract significantly more institutional investment.
“In the US and Europe, the volume of investment by institutional investors in rental apartments is much higher,” he says.
In recent months, Border to Coast, ACCESS and LGPS Central have confirmed a significant expansion of their property offerings. Meanwhile, LPPI and London CIV joined forces this year to launch the London Fund, which will invest in affordable housing alongside infrastructure.
Investments in the social rental sector tap into large and growing tenant demand and limited supply, he continues. As for build-to-rent, for example, where properties are built purely for the rental market and do not have targeted rents, he points out that the private rental sector in the UK is valued at around £1.5 trillion, but less than 2 per cent of that stock is build-to-rent, compared with around 15 per cent in Germany and 40 per cent in the US.
Demand for rental accommodation is also increasing as more people are able to afford to buy a home and are renting for longer. The average age of first-time buyers in the UK is now 34, compared with 26 in 1997.
At the same time, private landlords continue to be priced out of the market due to tighter credit conditions and policy changes. Activity from investors buying properties to let has fallen sharply due to adverse tax changes, including stamp duty, and tighter credit conditions, he explains.
“Taxes, regulations and access to external capital will make it much harder for small, private landlords to compete in this sector. There is a clear market opportunity to replace this regulation with financial institutions and social landlords.”
Historically, affordable housing in the UK has been funded through public housing associations. But these organisations also struggle with high costs of maintaining large portfolios and face rising construction costs to build new homes. They have lower capital levels, meaning social housing is increasingly funded by other forms of capital, says Dowdall.
“There are now many pension insurance providers on the market.”
The sector offers long-term, index-linked cash flows. He calls the low net yield “fair” for the risk taken and says GMPF is happy to take liquidity risk given its long-term liabilities.
“Social housing will have little vacancy and rent arrears and is strongly linked to inflation. The high inflation rate makes it an attractive investment. It brings a return of 6-8 percent on an IRR basis.”
GMPF’s seven-strong real estate team invests in housing through two distinct portfolios: a well-established mainstream real estate portfolio and a local impact portfolio comprising investments in SMEs and renewable infrastructure, where this portfolio will flow and where the fund is already financing nearly 4,400 new homes that are either completed, planned or under development.
Certain real estate sectors can generate higher returns than social housing, such as high-quality residential or office properties. However, these investments carry a higher risk because they are linked to the economic situation. “Occupancy and rent levels in social housing do not depend on the economic situation in the same way as in other real estate sectors, which gives them diversification qualities.”
GMPF has made a commitment to L&G’s national fund, but Dowdall says the fund would also be keen to invest to support the Manchester region.
Among the challenges is finding affordable housing. It is difficult to buy existing stock or new stock at prices that people can afford. The sudden collapse in rental income in London due to the Covid pandemic has highlighted another risk.
