Five UK local authority pension funds are investing £100m (€114m) in Hearthstone’s debut closed-ended, institutional housing fund.

Derbyshire Pension Fund, Nottinghamshire Local Government Pension Fund, Staffordshire Pension Fund, Teesside Pension Fund and West Midlands Pension Fund have all become cornerstone investors in the 10-year fund.

Hearthstone Residential Fund 1, which expects to eventually raise £200m by November next year, will invest in the private-rented sector (PRS) across the UK.

Institutional capital has been moving into UK PRS in recent years, as domestic and foreign pension funds flock to the burgeoning market.

Hearthstone said its strategy of focusing on clusters of houses and low-rise apartment blocks “contrasts with a number of other residential funds which are focused on large blocks of flats in city centres”.

Acquisitions will include bulk purchases of newly built stock from house builders and standing investment assets.

Hearthstone said the properties will be in areas where there is strong rental demand from families and young professionals.

The fund aims to deliver an annual yield net of costs of 4%, supplemented by capital growth.

Cristoforo Rocco di Torrepadula, partner at Hearthstone Investment Management, said: “We see an opportunity to focus on regional centres of economic growth which are undersupplied with good quality rental accommodation.

“This is also an opportunity to bring institutional quality management to what has been to date a generally poor quality consumer product. We are particularly delighted to be working with group of local authority pension fund investors.”

Philip Atkins, chair of the Staffordshire Pensions Panel and leader of Staffordshire County Council, said: “This is an opportunity for funds to make an investment that firstly meets our investment requirements, but also contributes in a small way to the housing need of the country.”

Atkins said the the growing demand and undersupply of quality housing, in particular in the private-rented sector, makes residential property more resilient to economic downturns and attractive to long-term investors.

“The Hearthstone Residential Fund 1 will provide a reliable income stream over the next decade while the underlying assets will act as a hedge against inflation, ” Atkins said.

Hearthstone, which was launched in 2009, already manages the open-ended TM Hearthstone UK Residential Property Fund and The Housing Fund for Scotland.