The £43.8bn (€48.1bn) Northern LGPS is paving the way to open up its real estate investment programme to a greater number of fund managers and like-minded institutional investors.
The collective asset pool has developed a procurement framework that will enable its three underlying pension funds to invest in real estate with more flexibility both individually and collectively.
Kevin Etchells, investment manager at the Greater Manchester Pension Fund (GMPF), who has been leading the development of the framework, said it would allow the funds to “open up to a wider pool of managers and… potential partners”.
Northern LGPS brings together GMPF, Merseyside Pension Fund (MPF) and West Yorkshire Pension Fund (WYPF), making it the largest of the eight Local Government Pension Scheme (LGPS) pools, which were created after the UK government sought to consolidate local authority pension money to help boost infrastructure funding.
Northern LGPS is not planning to consolidate the existing real estate portfolios of the three pension funds, which comprise a mixture of direct and indirect holdings worth about £2bn, but will rather focus on collaborating in the future.
Etchells said consolidating existing real estate assets was unlikely to provide benefits that would justify the costs and governance challenges involved. The three funds are “in different parts of their journeys” in developing their real estate exposures and merging them would not “create a synergised portfolio”, he said.
For instance, GMPF and MPF have well established direct property portfolios, while WYPF is invested predominantly through pooled funds. In addition, GMPF has an investment programme focused on the regeneration of the North West of England.
The procurement framework would provide potential for collaborating in the future, either through shared mandates or one-off transactions.
It mirrors the wider approach to asset pooling being adopted by Northern LGPS, which unlike other pools is not establishing an FCA-regulated entity.
“We’re treating pooling quite differently in comparison to a lot of the others,” says Etchells. “It may well work for pools which have much smaller entities and in larger numbers, but with our pool it’s three quite significantly sized funds anyway, where we are already arguably benefiting from that scale on our own.”
That said, working in combination should enable the three Northern LGPS funds to take on bigger transactions on their own and, potentially, joint ventures with other large institutional investors.
“That is something that is really appealing to us now – to work with other like-minded, long-term capital,” Etchells says, “particularly if they have in-house resources as well, because we are a resource-light team.”
Northern LGPS also wants to move away from the trading of smaller real estate assets to owning “large strategic assets which are more sustainable for long-term performance”, and to move into specialist sectors.
This is also where a greater number of real estate fund managers are likely to be required. “This framework will provide us the optionality… to be able to procure managers at given times… and procure managers collectively for new allocations,” Etchells says.
Northern LGPS has issued a tender for services that come in six lots, including discretionary and advisory mandates for UK direct property investments.
The launch of the framework comes at a time of unprecedented economic and market uncertainty, when investors are waiting to see the full effects of the COVID-19 lockdown on real estate values and occupational trends.
But Etchells says the timing could “advantageous”. Responses to the tender are due in July and Etchells says there is no reason to enter the market at the moment.
“There might be pricing benefits towards the latter stages of the year, therefore we want to be able to take advantage of that,” he says. “If this framework allows us to do that then all the better.”
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