Agenda item

This report provides an update to members regarding property investments following on from discussions at the previous Pensions Committee and Board (PCB) meeting.

This report for noting, introduced by Thomas Skeen, Head of Pensions, provided an update to members regarding property investments previously discussed at the 13^th September 2018 meeting. It was highlighted that Members of the Pensions Committee and Board (PCB) had previously expressed an interest in exploring the possibility of investing in residential property, in particular property that would display high ESG credentials and cover a broad spectrum of affordability levels. At the PCB’s previous meeting, it had been noted that the Fund’s current property commitments would fall short of the Fund’s strategic allocation to property. The London CIV were invited to the 20^th November 2018 meeting to discuss with the PCB the potential for the CIV to include a residential property investment option.

Larissa Benbow, Head of Fixed Income for the London CIV, addressed the PCB regarding the matter. In addressing the CIV’s position on property, the PCB was informed that data was being collected from local authorities to ascertain the general consensus, and that there was an appetite amongst boroughs for investing further in property. There was currently a total allocation of £3.6bn for investment in property, of which £800mil was cash waiting for deployment with the remaining amount already invested. The CIV had initially intended to create a single property fund; however, given the appetite for different types of property, this position looked likely to change to at least two funds. £3.2bn of the total allocation was looking for just UK property, with the remaining amount allocated to global property. The CIV was seeking to understand what local authorities required from property mandates, to inform how the CIV should design their property fund offering. Early discussions with local authorities had indicated that investment with traditional commercial property investments, such as retail, offices and warehouses, was the prevailing consensus. However, some local authorities had indicated a preference for looking at other types of property investment, such as social housing and the private rental sector. All London Funds were due to be sent a survey in order for the CIV to gain an understanding of how funds wanted to deploy their property allocations.

Regarding ESG credentials, the PCB was informed that the CIV had recently approved a Responsible Investment Policy for its stakeholders, which maintained that investment should be conducted in a responsible manner. Regarding long lease properties, there was an opportunity to impose on those letting properties that they be run in an environmentally friendly way. ESG was at the heart of the research process undertaken by the CIV, and it imposed as many ESG terms as possible on funds.

The PCB were further informed of the projected timeline for the CIV’s property targets. This included launching a UK Property Fund and a Global Property Fund in 2019. Selecting a fund manager was not going to be an issue.

The Independent Advisor, John Raisin, noted that local authorities historically had to take what fund managers offered. The London CIV now provided local authorities with more scope to engage, and the 2016 investment regulations and statutory guidance had specifically allowed for some return to be foregone for social impact purposes. Equally, one employer within the fund could not undertake any action that would disadvantage any other employers within the fund. The council, as the administering authority, would therefore not be able to do anything that was in the interest of one employer but not others within the Fund. The Independent Advisor questioned whether the CIV could develop a fund which was a combination of, for example, private housing for “young professionals,” affordable housing, social housing, and temporary accommodation. Such an approach would deliver a social impact as well as serving the necessary investment purpose. The CIV advised the economy of scale was there and so this was the type of fund it would be able to explore. If such a residential property fund could be delivered, the CIV would request that a focus was made on, for example, London. It would be too difficult to be specific with the geographical targets but general geographical areas were an option to be explored.

The PCB noted that social renting at council rents would be high on the agenda of local authorities for the CIV to provide. The CIV noted that it would not be possible to guarantee this as they needed to ensure that the investments were a viable solution for the local authorities to invest in, to meet necessary return requirements.

The PCB queried whether the creation of such a new fund discussed above would create additional administrative duties for the Council. The Head of Pensions noted that there would be an increase in additional administrative duties for the Pensions Team but far less than it would have been otherwise because it would be through an existing fund manager, the London CIV.

The Chair noted that he and the Head of Pensions had attended a meeting with other local authorities regarding pension funds investing in genuinely affordable and social housing. At the meeting, an argument was made that it was possible for the pension funds to invest in an option that included social housing that did not affect the discount rate calculated by fund actuaries. The Head of Pensions noted that it would never be possible to invest 100% in social housing because the returns would not provide a great enough return for the fund, however a lesser percentage could be potentially viable, and determining this percentage was key.

The Chair informed the PCB of the London CIV Infrastructure Forum he attended on 8th November. The presentation included reference to a factory producing modular housing. Although presented as an infrastructure option, it was possible to invest in as a pension fund.

Resolved

To note this report, including verbal information that was given by representatives from the London Collective Investment Vehicle (CIV) at this meeting.