UK’s GMPF: Why institutional investors are pushing into the rental market

The £30 billion Greater Manchester Pension Fund (GMPF) the United Kingdom’s largest Local Government Pension Scheme is ploughing more money into affordable housing, targeting 30 per cent of its 10 per cent allocation to real estate to the residential sector.

The fund has just invested £120 million in a Legal and General fund that will invest in purpose-built social rent and shared ownership housing (where people buy a portion of a house and pay rent on the rest) that Paddy Dowdall, assistant director, GMPF, says has compelling low risk, inflation-linked income streams alongside measurable impact.

The allocation sits alongside previous investments in the “small” affordable rent sector, where rents are targeted at  30 per cent of tenant’s income and which has similar properties but is not part of the regulated sector.

GMPF has worked with L&G to design the allocation, composition of stock and pricing. “We wanted to make sure it was right for us,” says Dowdall.

A chronic shortage of housing in the UK has resulted in long waiting lists for social housing and young people left priced out of home ownership and Dowdall believes the sector is poised to attract much more institutional investment.

“In the US and Europe, the amount of investment by institutional investors in rented homes is far greater,” he says.

In recent months, Border to Coast, ACCESS and LGPS Central have all confirmed significant expansions of their real estate offering. Meanwhile, LPPI and London CIV have joined forces this year to launch the London Fund, which alongside infrastructure will also invest in affordable housing.

Investing in the social rental sector taps into large and growing tenant demand and constrained supply, he continues. For example, regarding build to rent where properties are built just for the rental market and don’t have targeted rents, he notes the UK’s private rental housing sector is valued at around £1.5 trillion but less than 2 per cent of that stock is build-to-rent compared to about 15 per cent in Germany and 40 per cent in the US.

Tennant demand is also boosted by more people stretching to afford a house and renting for longer. For example, today the average first time buyer age is 34 in the UK compared to 26 in 1997.

Meanwhile, individual private landlords continue to be squeezed out of the market, driven by tighter credit and government policy changes. Buy-to-let investor activity has slowed sharply due to adverse taxation changes including stamp duty and tighter credit, he explains.

“Tax, regulations, and access to leverage will make it much harder for small, private landlords to compete in the sector. There is a clear market opportunity for this provision to be replaced by financial institutions and social landlords.”

Historically, affordable housing in the UK has been financed via public sector housing providers called Housing Associations. Yet these organizations are also dealing with high costs to maintain large portfolios and facing rising construction costs to build new homes. Their affordability of capital is less, meaning social housing is increasingly funded by other forms of capital, says Dowdall.

“You now see a lot of annuity providers in the market.”

The sector offers long-term index linked cash flows. He calls the low net yield “fair” for the risk taken and says GMPF is happy to take liquidity risk given its long-term liabilities.

“Social housing is going to have low levels of voids and rent arears and a high correlation with inflation. The high inflation linkage makes it an attractive investment. It ends up a 6-8 per cent return on an IRR basis.”

GMPF’s seven-person real estate team invest in housing via two different portfolios: a well- established mainstream real estate allocation and a local impact portfolio that includes investments in SMEs and renewable infrastructure where this allocation will sit and where the fund is already financing close to 4,400 new homes which have either been completed, planned or are in development.

Certain real estate sectors may achieve higher yield than social housing, such as higher end residential or office. Yet these investments  carry higher risk because they are linked to the economy. “Occupancy and the level of rent for social housing is not linked to economy doing well in the same way as other real estate sectors giving it diversification qualities.”

GMPF has made a commitment to L&G’s national fund, but Dowdall says the fund would also like to invest to support the Manchester region.

Challenges include problems sourcing affordable homes. It is difficult to buy existing stock or buy new stock at rates that people can afford. The sudden collapse in rental incomes in London due to the Covid pandemic also highlighted another risk.