The single-family housing sector is attracting strong interest from LGPS funds, says Jonathon Ivory, chief investment officer at Packaged Living, a partner of Fiera Capital. What explains this?
Investors seeking ways to diversify their returns and hedge inflation are increasingly allocating capital to real estate sectors where income is index-linked and returns are broadly uncorrelated to public market performance. For LGPS funds, priority is typically given to market opportunities where income meets capital appreciation but also where the sustainability and impact stories are strong. It allows them to deliver on their fiduciary duty to their members, while making a positive contribution to the communities they serve.
This backdrop helps us to understand why single-family housing (SFH) has enduring interest to LGPS funds. As well as meeting LGPS investment preferences, an allocation – direct or indirect – addresses the undersupply of housing of different types and tenures across the UK. The sheer weight of investment coming into SFH is an indication that LPGS investors are becoming increasingly comfortable with emerging sectors in UK real estate. This is in part due to the sluggish growth of traditional sectors such as retail and office, but also because in many market segments the opportunities to outperform and achieve scale are tapped out, whereas in SFH an early-mover advantage is still available.
What role do you see it playing in LGPS portfolio construction and asset allocation?
SFH investment can play several roles, depending on how it is integrated into a balanced portfolio. For the many schemes that already have real estate or wider real assets exposure, SFH is a returns enhancer, with the characteristics of a solid portfolio fit, when considering risk-return thresholds. It is also a diversifier that has the potential to generate consistent distributions with a higher Sharpe ratio than real estate sectors with comparable risk profiles, which is important in the context of increasing volatility in the global equity and bond markets.
For these reasons, investors are taking larger positions in the residential sector and there is fresh interest in GPs that can open the door to new opportunities that match their risk preferences. The low stock of SFH relative to other developed market sectors is, specifically, attracting capital from investors wanting to move further up the risk curve and capture value-add returns. These assets are best accessed through specialist investment managers that combine experience in investment, development, planning and property management.
What role can SFH investment play in addressing housing undersupply?
At its most fundamental, the delivery of SFHs enhances access to secure, high-quality housing in a period when the UK housing crisis is deepening. Supply won’t be built overnight at a sufficient scale to address latent demand, so private capital has a huge role to play in meeting the 300,000-home per year target set by the government.
Beyond the countrywide supply-demand picture, increasing market sophistication means SFH has emerged as a new category of build-to-rent housing. A huge volume of institutional capital has entered multi-family, in particular, so it addresses intra-sector supply constraints for housing of different types and tenures. The patient mindset of pension funds, endowments and plans is naturally accretive to new rental housing delivery, where long-term development pipelines are common and income is never immediate.
Partnerships between LGPS funds and housebuilders are also key to unlocking further delivery in local areas and putting downward pressure on housing costs. This is because pension capital will often release a ‘stuck’ parcel on site or provide an exit opportunity to a housebuilder, which can then begin work on another nearby development. This positive impact on local supply-demand dynamics will benefit prices.
What does Fiera mean when it talks about additionality?
Additionality is in essence about maximising the sources of tenure, supply and capital in the housing market. Solving undersupply isn’t just a question of building more houses for sale; it’s about creating variety through additionality. This means recognising that we have a population with a vast array of ages, salary brackets and life-stages, and our housing stock needs to reflect that. SFH is an important new addition in that respect, signalling a new era in which families can rent housing that is high-quality, professionally managed and delivered by institutional capital.
There appears be a range of products, strategies and entry points in the SFH sector. Can you talk to us about Fiera and Packaged Living’s strategy?
Broadly speaking, investment into SFH is split between new-build development strategies and ‘legacy stock’ strategies which, in simple terms, refer to the acquisition of individual houses that are acquired on a granular basis to create an aggregated portfolio.
Fiera and Packaged Living is exclusively focussed on new-build development in the suburbs of leading UK cities. We are the investor, developer and operator of the assets, with established housebuilders being the delivery partner.
Collectively, we have a more than 20-year proven track record in the residential sector, having successfully delivered and secured planning for over xxxx units across high-quality residential schemes across key markets.
We do this by entering forward-funding or forward-commit transactions on a single or multi-site basis. We believe in this model for several reasons but, above all, it’s because investors can capture outsize returns through ownership of best-in-class, modern and highly sustainable new-build housing without taking construction risk. It maximises upside potential while limiting downside risk.
New build development helps investors future-proof their portfolios against changing regulatory priorities, with data also showing that more sustainable housing also translates into higher rents. Having large developments or clusters of new build housing, rather than them being ‘pepper-potted’, also creates efficiencies in operational strategies and, by extension, improves net operational income.