LPFA could start wave of investment in UK housing

UK - The £3.5bn (€4bn) London Pension Fund Authority (LPFA) could be the first in a number of UK pension funds investing in the residential real estate sector.

The local authority pension scheme is mulling a £35m (1%) allocation to residential property, as fund managers move closer to launching investment vehicles targeting the asset sub-class.

Unlike many of their counterparts in continental Europe, UK  pension funds have tended not to restrict their UK real estate investments to the main commercial sectors, although student accommodation has proved increasingly popular in recent years.

A spokesman for LPFA said negotiations with fund managers were still at an early stage. Scheme manager Mike Taylor is understood to be scouting London-focused funds with multiple investors, rather than bespoke vehicles.

A fund in development by Aviva Investors' fund manager Neil Gardiner will target both UK and overseas investors, although it will hold exclusively UK assets, with a focus on London and the southeast.

Athough he denied UK press reports that he was setting up a fund specifically for LPFA, Gardiner confirmed: "It happens that we're in the market. We're looking at a number of key investors with a mutual interest in residential."

The fund's investor base will include overseas pension funds. "In the US and Europe you already have major investors in the residential sector. They understand it and they understand its risk-return characteristics. It's just that they haven't found a point of entry into the UK market," said Gardiner.

In the recent past, institutional investors have largely seen UK residential as fragmented - the £3.6trn (€4.2trn) buy-to-let market involves a large number of very small players - and over-regulated.   However, the credit crunch has created a new opportunity for pension funds to step in to fund impoverished property developers who may then offer discounts to bulk buyers.

Aegon Asset Management is another fund manager interested in developing UK residential investment products for institutional investors.

"It's an interesting time to be looking at residential," said Gardiner. "The key barrier in the past has been getting the scale that allows you to build economies of scale and acts as a risk diversifier. We're looking at building stock and bringing in professional management. There needs to be scale for institutions to be able to buy buildings. Among developers, there is a lack of development funding and the developers are looking at other options."

Gardiner acknowledges that historically the concern of investors interested in residential has been reputational risk - few pension fund trustees relish exposing their schemes to the responsibility for evicting vulnerable tenants. But he points out that 50 years ago, major UK insurers such as Norwich Union and Prudential were "huge investors" in the sub-sector.

"We see our tenants as clients rather than tenants. That's very important to us," he said. "With the right quality of management, clients will see a level of service you don't often see in the UK market."

Although Gardiner's fund does not have a target size, he said he would like to see it reach £500m. There is as yet no launch date - the fund manager is still talking with investors - but Gardiner said he hoped to see the fund launch "sooner rather than later".

In April 2010, Adrian Bell, chair of Genesis Housing Group, criticised local authority pension schemes in the UK for not investing in housing in the country (See earlier IPE Real Estate article: Local authority funds urged to invest in housing).