A goal to attract more institutional investment in the United Kingdom’s rental housing sector aligns with in-progress efforts to forge eight larger asset pools from the country’s 89 local government pension funds. The UK government’s new white paper, Fixing our broken housing market, presented to parliament earlier this month, identifies the pools as a means to diversify housing supply with flow-through benefits for pensioners and the wider economy.
“The pooling of local government funds will increase opportunities for their assets to be used to support infrastructure projects, including housing. This could generate promising returns for scheme members while maintaining value for money for national and local taxpayers,” the white paper states. “We want to attract major institutional investment in new large-scale housing, which is purpose-built for market rent. These developments tend to be built out more quickly, adopt modern methods of construction and help regenerate local economies by attracting a skilled labour force.”
Much of the white paper’s focus is on ownership tenure, but it also touches on the need to increase the supply and quality of the private rented sector (PRS) where about 4.3 million U.K. households currently reside. This number has nearly doubled since the turn of the century and the sector now accommodates more tenants than the UK’s extensive network of publicly owned local housing authorities. Nevertheless, a December 2016 parliamentary briefing paper describes private rental as “a cottage industry”, citing a 2010 government survey that found 89 per cent of the country’s landlords are private individuals and only 2 per cent hold more than 10 properties.
The white paper also points to the government’s financing guarantee scheme for the private rented sector — funded with 10-year bonds first issued on the London Stock Exchange in November 2016 — as a lure for a more sophisticated investor base. Announced by the previous Conservative-Liberal Democrat coalition government in 2012, the program is targeted to new developments with a minimum aggregate value of £10 million (CAD $16.4 million).
Last fall’s £265 million (CAD $434 million) bond issue is the first increment of a pledged £3.5-billion (CAD $5.7 billion) fund. Sought after institutional investors could presumably be bond purchasers, housing developers or both.
“We are delighted to see such interest from institutional investors in the inaugural PRS Finance Plc’s government-guaranteed bond,” reported Richard Green, head of PRS Operations Ltd., the UK government’s manager for the scheme. “The availability of attractively priced funding should assist PRS operators to come to market and supply housing units into this much needed, quality, long-term rental sector. With a significant pipeline of projects in the planning and development stages, which the government’s PRS scheme will assist fund, we expect PRS operators to be able to accelerate their projects and create value for investors and tenants alike.”
Meanwhile, moves to reform the UK’s local government pension scheme began with former Chancellor of the Exchequer George Osborne in the pre-Brexit era. Eight proposed pools — four of which will have at least £34 billion (CAD $55.7 billion) in assets — are now working through the many details of the envisioned arrangement, which has a target launch date of April 2018.
However, reports of discussions last summer suggest fund administrators may be wary of any agenda to procure private rental housing investment. “There was a strong feeling in the room that Administering Authorities were being encouraged to consider inappropriate investment for political gain both at the central and (in some cases) local government level,” a summary of the session notes.
A submission to the UK government’s public consultation from global investment consultant BNY Mellon also warns of potential conflicts of interest if local government pension funds invest in assets located within their own jurisdictions.
“A local authority could find itself both seeking to provide low-cost social housing or promote development within its territory, while at the same time seek to maximize income from social housing or business tenants in property it owns in whole or part, or in which it has an interest,” the submission states. “This conflict is manageable, but care must be taken to ensure accurate valuations of market rates are obtained and adhered to.”
