UK - Pension funds should consider investing in "top tier" UK housing associations currently unable to directly tap the public market for capital, consultancy Redington has urged.

The company's managing director David Bennett highlighted the potential for pension schemes to invest in both new developments being launched in the social housing space, as well as helping to address the sector's need for redevelopment.

He said several institutional investors were exploring the asset class for investment, with two of Redington's clients currently implementing a social housing portfolio.

Bennett admitted that while there were opportunities for direct investment, these would be restricted due to the limited number of pension funds large enough to do so and instead suggested indirect investment through funds.

"The favoured approach is to try to access the housing associations that are just a bit below the top tier," he explained. "The biggest ones have access to the public market, but there is an excellent opportunity to provide funding to the very high quality ones in the second tier by size that wouldn't have access to the public debt market."

He cited M&G Investments and Aviva Investors as two fund managers to have launched pooled funds targeting the sector, as one way for schemes unable to afford direct investments to gain exposure.

Bennett said the fund managers hoped pension funds would recognise the need for limited price indexation (LPI), admitting that there were not many LPI lenders currently active in the market.

"To find something that exactly matches the scheme's LPI-linked liabilities is quite a good opportunity," he insisted, adding that, due to the need for both redevelopment and new builds, there was a "significant" need for outside financing, one that was currently not being met by schemes.

"So the only real challenge on the supply side is the speed with which the housing associations can adapt to tapping into pension funds as a new source of finance," he said, admitting that pension funds still were only showing "limited" interest in the sector.

He stressed that while the investment would not act as a matching asset, as a pension fund's mark-to-market liabilities would be driven by gilt prices, the illiquidity premium stemming from the investment was worthwhile capturing.

Bennett admitted that social housing was not a perfect fit for either traditional fixed income or property allocations.

But he said: "We think it's important for pension schemes to think about their asset allocation to enable investment in this hybrid asset class that's neither a traditional growth nor matching asset, but offers secure, long-dated, liability matching cash flows as well as attractive returns."