UK pension funds given property investment incentives

UK pension funds are being encouraged to support the residential property market via an initiative which would see them invest in the private rented housing sector for the first time.
The objective of the Private Rented Sector Initiative, proposed by the UK government-sponsored Homes and Communities Agency (HCA), is to work with financial institutions and other investors to develop a long-term funding model for new private rental housing in England.

Pension funds have not traditionally invested in the UK residential letting market due to the return profile of the investment. Residential property investment tends to offer capital growth rather than income, which is not attractive for institutional investors, who are trying to match investments against liabilities.

However in the current market, it is thought that sufficiently high net yields could be achieved from rental streams without reliance on capital growth, potentially producing long-term underlying returns equivalent to gilts (UK government bonds).

“To date, achieving scale has been one of the main barriers to attracting institutional investors into the housing sector,” said Sir Bob Kerslake, chief executive of the HCA.

“Projected rental yields and the current market suggest that the time is right, and that is why we are engaging with the market to develop the proposition further.”

Under the initiative, an investment vehicle would be created with the aim of buying private rental homes from developers and housebuilders, and holding the assets for investment purposes.

The main focus is to facilitate the building of new homes for rent, but recently-built homes would also be considered as “seed assets”.

The initiative is in line with moves afoot in Australia, where superannuation funds have been urged to invest in nation building projects such as social infrastructure, including retirement homes and affordable housing.

Recently, the Federal Government announced the establishment of a new company to build and operate the A$43 billion National Broadband Network, and called on super funds to help fund it.

According to the HCA, informal market testing indicated there is “a sufficient level of institutional interest” in the initiative, prompting the Agency to formalise its market engagement by launching an expression of interest.