Mona Dohle caught up with Aoifinn Devitt, recently appointed as chief investment officer at London CIV, to discuss how the pool plans to expand its investments in real estate.
Can you tell us more about how London CIV invests in residential real estate?
We have two main funds that feature housing. The London fund is a partnership between LPPI and London CIV, it has a double bottom line focus providing positive environmental and social outcomes as well as positive returns.
The London fund now has £250m of partner fund commitments and is c.60% committed today across four assets including a build to rent residential investment vehicle. This vehicle supports the development of new quality private rented sector and affordable housing stock and is focused on creating residential neighbourhoods with best in class operations and a positive resident experience.
We have also co-invested into a hyperscale data centre platform in London, this is the London fund’s first infrastructure investment. And we also have a class A office investment near London Bridge which is a net zero office building, scheduled to be completed in 2026. So, while residential property is a part of this fund, it is not the focus.
We also have our housing fund which we launched last year; it invests only in UK housing but not exclusively in London.
We are now starting to build this portfolio for our UK housing fund. Our main focus is general needs social and affordable housing where a minimum of 50% of commitments will be invested but we also have the ability to invest in specialist housing and transitional supported housing.
This interest in affordable housing is widespread among our partner funds and we have been fortunate that this fund has seen strong traction in its initial stages.
Having joined London CIV quite recently but with many years of experience working with the LGPS, what are the lessons on investing in housing we can draw from other markets such as the US?
There is a long history of residential investment in the US, and it comprises a meaningful part of a mainstream property index. The focus there was not on affordability but much more on yield or value-added strategies. Often the value-added piece will consist of turning around multi-family housing through upgrades. While improved energy efficiency may well be a target of these upgrades it is not the dominant factor.
Certain product offerings in the US do provide access to affordable housing, and the structure of the opportunity there is somewhat different to that in the UK.
At London CIV we have a twin aim approach – we focus on generating a meaningful return, predominantly through inflation linked income as well as facilitating a meaningful supply of good quality affordable housing. In addition, a large component of our investment due diligence process is assessing underlying housing managers effectiveness to generate, measure, and report impact. We are also tapping into the knowledge of market leading IMPACT investors such as Big Society Capital, who are driving the IMPACT framework standards expected of managers.
Our investments in housing really showcase the importance of collaboration, dialogue and working together with industry partners.
Aoifinn Devitt, London CIV
You are facing quite a unique challenge in your new role in building investment portfolios for 32 local authority funds, many of whom already have their own investments in real estate. What is the case for investing through a pool instead of doing these investments individually especially when it comes to local impact investments?
There is clearly a benefit in scale and having access to a diversified pool of managers, especially when it comes to affordable housing. It is difficult to get exposure to these assets as an individual fund, while when they form part of a diversified pool access becomes possible but a pool that continues to grow and offers resources can offer better returns.
Our investments in housing really showcase the importance of collaboration, dialogue and working together with industry partners. This is an industry where scale matters and we are in a unique position to work with other entities to fashion solutions.
Having access to industry knowledge is key. As the investment partner to our underlying funds, we can push into these circles more thanks to our dedicated team and resources to invest in real estate can be very helpful.
Can you tell us more about your plans to invest in affordable housing?
This is a strategy that our clients are focused on, as housing is especially a concern for local authorities, it is affecting their day-to-day business. There is a visceral social need for affordable housing.
We are now looking at a number of affordable housing products in the market. There are quite a few different funds in the market, including over 10 offerings of UK housing funds. They can be organised around the UN SDGs and they all have robust ESG credentials and impact frameworks, that is the universe we are looking to invest in.
It is an emerging universe in many cases but having that joined up impact framework that I mentioned before is crucial, this framework is becoming an industry standard.
How do you define affordable?
There are many definitions of affordable including regulatory definitions. For instance, uncapped affordable housing is typically set as 80% of the market rent, while in a social housing context that might be much lower – closer to c.50%. Market definitions often fail to guarantee that the individuals targeted for those properties can genuinely afford to live there. For example, 80% of the rental market in most London boroughs is still elevated. We are focused on drilling into affordability at a micro and local level. We do not have an official definition within our housing fund, but rent should ideally be equal to or less than 33% of net household income.
We are focused on delivering returns for our underlying partner funds and and increasing the supply of affordable housing; one of the attractions of the sector is that it is often linked to or typically tracks inflation.
Aoifinn Devitt, London CIV
Does offering affordable housing mean that you might have to compromise on the inflation linkage?
Regulatory affordable housing rents typically increase annually according to the government rent regime which is typically in the form of an inflation plus measure, currently defined as CPI + 1%. Annual increases in social rents were capped by the government at 7% p.a. from April 2023 through to March 2024, acknowledging the elevated levels of inflation at that time. We are focused on delivering returns for our underlying partner funds and and increasing the supply of affordable housing; one of the attractions of the sector is that it is often linked to or typically tracks inflation.
Are you seeing attractive pricing opportunities in real estate due to corporate DB schemes selling off more of their illiquid assets?
We are in due diligence on secondary opportunity in a housing fund where corporate DB schemes are selling. There have been many factors that have affected the recent valuation revisions in real estate and some institutional investors have been seeking to liquidate from both illiquid assets as well as listed real estate funds to address overweights caused by the denominator effect. We have not yet reached a stage of enough visibility to give meaning to current valuations, but we believe that some signposts are emerging that should make entry points clear in the near future.
There is a debate within the LGPS on what local investment should mean. London CIV is offering the London fund, which invests in residential property What is the investment case for it?
We often hear of this desire to be local from our partner funds. Of course, we have to make sure that these investments meet our criteria as to risk and return. London, given the size of its economy, the fact that it is a capital city and a major financial centre, offers plenty of opportunities for investment and we are excited by the current renewed push around UK innovation and investment.
