UK – Local authority funds in the UK should consider the economic impact of committing to residential property, according to a London councillor who argued a 2.5% investment from schemes could build 20,000 homes.
Richard Greening, councillor in the London Borough of Islington, said that, had his £810m (€955m) local authority fund not committed £20m to a Hearthstone-run residential fund earlier this year, the money would have been invested in equity, a prospect he did not prefer.
"We need a greater diversity of investments," he told a Public Sector Pensions conference in London, saying it was time to move away from having "too many eggs in the equity basket".
He cited a number of reasons funds were hesitant to invest in residential property, including the liquidity risk and the 15% threshold on local government pension scheme (LGPS) investment in limited partnerships, which he noted had "fortunately" increased to 30%.
However, he said there was one key reason no one wanted to invest in housing.
"Nobody else is doing it," he said. "Of course, if you want to do something new, Machiavelli will tell you won't have any friends, and it is certainly the case that any advisers to the London pension funds have not been keen on residential property."
He said Islington had decided to explore residential property after it became apparent the fund would become cash-flow negative.
"Our previous strategy, when we were cash-flow positive particularly, was to use that cash to invest in the equities to seek growth to reduce the deficit," he said.
He added that, instead of the equity-led approach, the fund was now seeking higher returns with lower risk, pursuing instead a liability-matching approach.
However, Greening also said economic considerations weighed on the fund when deciding to commit to residential as an asset.
"We have a political preference for investments that stimulate the UK economy," he said.
"The chancellor has expressed an interest in this, so it seems reasonable that pension fund trustees, council members of the committee should also be interested in that topic.
"If you took the same proportion, 2.5%, of all LGPS funds, it would generate 20,000 new homes across the UK, with the potential for 200,000 new jobs."
A report by the Future Homes Commission had previously suggested LGPS assets should be used to stimulate house construction, a call that was later backed by Islington's fund manager Hearthstone.
Challenged by a delegate as to why councils should invest in private housing over social and affordable builds, Greening replied: "There are some interesting proposals in that area, but there isn't yet a fund."
Christopher Down, chief executive of Hearthstone, added that commitment to the firm's fund offered Islington a lower-risk approach over direct investment, as pursued by the Greater Manchester local authority scheme when it committed £25m to a construction project in the city.
Steve Dainty, head of pensions at local authority joint venture LGSS, also saw direct investment as problematic, particularly given the approach some members of local authority pensions boards took in regard to investment.
"When they start talking to me about direct investment in infrastructure, then I go out and I board my yacht," he said.
"What I mean by direct investment in infrastructure is that they are going to fund the new county hall from the pension fund, for instance."
He insisted that such an investment should be a "no-go area", even if some viewed it as a possibility.
"To my mind," he said, "any contact, you very rarely get two winners. There is always going to be a loser.
"I find it very difficult in that area to understand how we get out of that conflict of interest."