Pensions and Rented Housing
by Ken Gibb
The Scottish Government released a press release yesterday supporting an initiative led by Homes for Scotland that aims to examine how to encourage investment in rented housing by pension funds and the main insurance companies too (and identify barriers to investment). It is not clear whether this is primarily about market rented housing or affordable/social housing. As far back as Alex Neil’s days as housing minister, there has been much interest in Edinburgh about finding ways to tap into these large institutional funds. This echoes the UK Government’s long-term aspirations to encourage institutional investment into private renting. If the funds are content to invest a non-negligible share of their portfolios in commercial property, then why not in residential investment, too?
As far as private renting investment goes, there are well-trodden arguments about transactions costs, management costs, tax transparency and specific risks that are identified by housing and financial analysts alike. There is investment but it is limited and nowhere near the levels initially suggested. Real estate investment trusts (REITs) are, it is suggested from international evidence, a slow burn that can take decades to really take hold. In the UK they have largely been used to convert existing property businesses rather than as additional residential investment. Social REITs did not prosper as a policy option even though one or two landlord-investor partnerships felt they could make it work as affordable rented housing.
Turning to affordable and social housing, it is important to point out that the funds do invest in non-market housing. They are the main purchasers of housing association bonds, they have been known to act as banks lending to the sector, they have been involved in sale and leaseback schemes with social landlords, and, municipal pension funds have taken on large-scale investment roles in both Manchester and Glasgow. What they have not done as yet is show any large appetite for the pension funds to provide equity investment in joint venture partnerships with social landlords to provide affordable housing to a reasonable scale.
This may not be too surprising. Social providers have to tackle governance issues about setting up these sorts of ventures. There are greater risks for the funds attached to rented housing because of benefit changes, even if the client group for affordable housing is not so benefit-dependent as would be the case with social housing. More generally, however, there is a demand problem – the funds do not think these options fit with either portfolio mix or provide the required expected risk-adjusted returns (they may in some cases be satiated by their housing bond holdings). The exceptions to this are these large municipal pension funds. But one questions whether there is a lot of untapped appetite for risk from these quarters either.
While one wishes any initiative well that might provide additional funds for housing this will not be an easy assignment (especially to provide durable investment models that bring scale). Two other thoughts occur. My recent Joseph Rowntree work suggested that new housing finance policies take time to bear fruit, especially if new to the sector. Such policies really do need to be carefully designed, piloted and road tested, lessons learned and then given the chance for the market to develop interest and enthusiasm. It takes years to do this sort of thing right. In other words, it is hard to imagine that such policies will rapidly roll out and certainly not in the present political attention span. That is no reason to resist such policies if they are good ideas. Second, the JRF research also stressed that if an increasing share of new non-market housing is to be affordable renting it will not directly address acute housing need and will only filter down to it, if at all, very, very slowly. The funds will find it hard to generate the required returns with anything less than affordable rents. More rented housing will help the labour market, stimulate house building and to an extent re-balance the economy but if it is, increasingly, not social housing it will not alleviate those most exposed to market forces and austerity. So, a bigger role for pensions as investors may be helpful but it can only be part of the answer if we are interested in the housing system as a whole.