Islington Council will invest £20 mln (approx. 24.7 mln) of its £800 mln pension fund with residential property investment manager Hearthstone Investments in a move expected to reduce liabilities and boost the supply of housing in a time of government cuts.
Islington is the first London borough council pension fund to invest in residential property. The TM Hearthstone UK Residential Property Fund, which Islington has chosen following a competitive procurement process, is also available to retail and institutional investors and is the UK's first residential PAIF (Property Authorised Investment Fund).
Cllr Richard Greening, Islington Council's executive member for finance and performance, said: "Our decision to invest in residential property is based on careful analysis of the options. It reflects our view that investment in this sector will produce good long-term returns for local taxpayers and the members of our pension fund.
"We selected the TM Hearthstone fund because it is the only FSA regulated fund in the sector and is run by a team with considerable investment management experience. The fund offers a tax-efficient means for our pension fund to invest in the UK's largest asset class without taking on the risks associated with investing in housing directly or in smaller schemes.
"We look forward to other pension schemes joining the fund and to starting a mass movement which will help to increase the supply of much needed new housing in our country."
The fund holds a diversified mix of new and recently built properties, half of which are London and South East based. Most units are let to private market tenants, with some corporate lets. It is expected to yield 4% net rental income, growth with capital values predicted to slowly rise to a stable 5% growth per annum by 2017.
Tenders were advertised on June 11 and nine were received. Three fund managers were short listed and interviews were held by the Pension Sub Committee, chaired by Cllr Richard Greening on November 6.
The selected appointment into the Hearthstone fund is subject to agreeing terms and conditions.
Commenting on the investment, Christopher Down, Chief Executive of Hearthstone Investments, said:
"We are very pleased to secure this landmark investment by Islington Council pension fund. Recent government and media attention has highlighted the opportunity for local government pension funds to play a role in the delivery of housing, a stable long-term investment which can support social objectives while delivering diversification to multi-asset portfolios.
"However, financial performance and the safe custody of assets for hard-working pension scheme members must remain a key priority. The result of this tender process establishes a clear benchmark in this regard, emphasizing the importance of regulation, transparency and financial strength."
Source: FTI Consulting