Have you allocated 3% to housing?

With more pressure on local authorities to invest in sectors which positively impact their constituents, there is also an increasing move towards social impact investments which can help reshape local communities.

In 2015, Natalie Elphicke’s Government report recommended that 3% of Local Government Pension Schemes (LGPS) should be invested in local housing projects to help tackle the UK’s chronic housing crisis. As investors look to further diversify their portfolios, however, there has been an increasing shift towards alternative options which share the same return characteristics. Despite a structural shift towards renting in the UK, DCLG estimates that 70% of privately rented homes are owned by landlords with fewer than 10 properties. This means the sector has been unable to offer the required scale to attract investors whilst portfolios have been composed of ‘Build for Sale’ homes, not designed with residents in mind. The Build To Rent (BTR) sector is changing this.

The rising trend of renting and the lack of appropriate housing has created the need for a new approach. BTR schemes now taking shape are large purpose-built developments with community-supporting services that offer long-term, family friendly leases - providing security and flexibility. They are also designed to be sustainable, aiming to reduce carbon impact and with improved insulation, water and efficiency. Developments also tend to include a variety of facilities (such as gyms, resident lounges and commercial units) that are open to the public, ensuring that local people benefit, too.  

BTR is making a powerful contribution towards delivering more UK homes. Homes England estimates that England needs 300,000 new homes per year to meet demand. The 2017 Housing White Paper acknowledged that institutionally held BTR can have a significant role in reaching these targets, whilst the Letwin Review called for a mix of tenures to address the housing crisis.

The risk/return profile and income focus also makes BTR a perfect match for LGPS. High numbers of occupants, huge diversity and long leases mean income streams are stable, and often linked to price indices. This helps meet long-term liabilities, whilst providing a hedge against inflation. It also offers important diversification benefits from more cyclical investments in the wider commercial property market. 

The BTR market is maturing with a robust track record. Since launching three years ago, our BTR Fund has committed over £1.2bn to the sector. With a number of LGPS already invested into it, we now have 3,700 new homes in the pipeline across the UK, providing housing in areas which really it.

Today’s BTR schemes are demonstrating the notable impact that these investments can have on local areas. Our multi-award winning development, The Slate Yard in Manchester, formed a central part of the £650m regeneration of Salford Central. It is now a dynamic new district that offers quality homes in a central location and attracts local employment and corporate tenants such as Magic Circle law firms.

As the housing crisis remains one of the most pressing issues facing the country, there is an increasing role for councils and their pension schemes to help provide quality, affordable rental accommodation at scale. Widely welcomed by Government, this can help local authorities pay their pensioners in the long term, whilst improving local communities, creating jobs and helping to reshape local areas for the future.

Dan Batterton

The Build To Rent market is maturing with a robust track record. Since launching three years ago, the Fund has committed over £1.2bn to the sector.

Dan Batterdon, Head of Build to Rent, LGIM Real Assets