Fixing the broken housing market with our pensions
We are in a housing crisis, now acknowledged by the government and the only way to address a crisis is to get everybody pulling in the same direction and utilising all available resources. As the housing White Paper pointed out, it should be a moral duty for everyone to tackle the broken housing market head on so all the stop should be pulled out to facilitate greater investment in housing.
Financing house building presents a stumbling block especially for social housing providers, with housing associations and local authorities locked out from accessing mainstream government funds. The £3bn Home Building Fund, the £1bn Build to Rent Fund as well as the hundreds of millions devolved via the Housing Investment Fund to Combined Authorities can only be accessed by private sector companies.
The Greater Manchester Pension Fund has long invested in property through the Greater Manchester Property Venture Fund (GMPVF) however residential property has to date only accounted for a very small proportion of this. The fund has been used to develop the Matrix Homes project which has delivered 240 homes and pension funds have been used to provide loan finance to a developer in partnership with the GM Housing Investment Fund. The potential to expand residential investment from pension funds is a credible option requiring further exploration and Greater Manchester are preparing to scale up the Matrix model.
Public institutional wealth such as pensions, with an ultimate social goal of ensuring their members long term welfare appears an ideological fit with a long term social good such as housing. In the Netherlands over 40% of pension funds are invested in residential property, while in the UK this figure is less than 4%.
But pensions funds, despite their size, are only part of the potential answer to the housing problem. We need to remember whose money this is, the people who have worked a lifetime for these savings deserve a secure retirement and the fiduciary responsibility of pension managers mean they have to seek a decent long term return. However, returns are generated from a mixture of layered investments, a pension portfolio is made up of a range of different asset classes, stocks, shares and bonds. Some of these are high performing (and difficult to divest from e.g. oil) but come with higher risks, others are lower performing but are more stable over the long term, and housing can and should be a much larger part of this mix, with residential housing providing returns a few points above bonds, it’s worth exploring how the Netherlands is making this work.
Research by CLES back in 2012 showed there was a lack of a supportive framework to enable local government pension funds to invest in housing. To scale up investment in residential homes, the government needs to do much more to provide the appropriate mechanism and confidence; Nationally some form of clearing house, treasury backed, could provide that enabling platform, encourage greater pooling of funds, allow smaller funds to piggyback on larger ones, benefiting from the due diligence conducted.
A national crisis needs national commitment, simply alluding to the use of pension funds for housing in the White Paper is not enough.
Back to the Netherlands, the main reason there is such a high level of pension investment in residential housing is that the rental market is split into a regulated market and a non-regulated market, with 88% of all rental dwellings in the former. The Netherlands has a pro-tenant private rented sector unlike the UK, and while ‘build-to-rent’ models with more secure tenancies may appeal to institutional investors, the housing White Papers real failure was to stop short of further regulation of the private rented sector which could see existing stock receive much more investment.
Fixing the broken housing market will only be possible if local authorities are enabled and empowered to once again become volume housebuilders and investors. New joint ventures and local authority development companies are emerging. Local pension funds would be a valuable addition to this mix. However, in our drive for volume we are pushing social housing providers into commercial models (with a desire to designate Housing Associations as private bodies), with a concern that social purpose could take a backseat and the end of social housing as we know it may be nigh.