Using pension funds to build a better Britain

The launch of the Smith Institute’s report on pensions almost coincided with the release of RIBA’s Future Homes Commission under Sir John Banham. Banham calls for local authority pension funds to invest 15% of their funds in housing, to match continental levels, which would put an extra £100bn into housing finance, and boost the economy in the process by 3%. The Smith Institute report is much more cautious, suggesting a fund of £10m to get something underway. Both  reports, though excellent, fail to deal with the fundamental issue which is how to pick viable long-term investments, and secure the ‘quality deals’ needed to give investors the returns they expect.

To address this issue URBED has undertaken a series of studies into the economics of sustainable development. These have drawn on study tours to leading European examples where new housing has been built to much higher standards.   The common finding is that a range of countries — Germany, the Netherlands, Sweden — as well as France have succeeded in building more and better homes much faster through municipalities being able to draw on long-term debt finance.

This has been made available through municipal or state banks — Kfw, BNG, Kommuninvest and Caisse des Depots — which provide local authorities with the funds for assembling land, drawing up plans, and providing infrastructure. Intriguingly European local authorities have managed to avoid all the restrictions on public procurement that has hampered British efforts, while international accounting regulations have avoid the loans counting against the public sector borrowing requirement.

As a result France and Germany have invested almost twice the proportion of GNP in new housing (6% versus 3.5%) and enjoy a much more resilient infrastructure. So how can we in Britain, wedded to the flawed Anglo-American financial system, build ourselves out of the holes we have dug, and ensure our savings secure better returns? How can we use the undoubted housing deficit to provide pensioners with better returns? For, as the pension trustees pointed out at the Smith Institute report launch, their first duty must be to their beneficiaries, and many local authority funds are in danger of being underfunded, as obligations grow and contributions fall.

As well as promoting the idea of municipal bonds for funding infrastructure, one idea from the USA that works rather well, URBED has sought to pioneer several different approaches to funding innovative developments.

My first involvement with building homes was to help set up a company to build a new village of 500 homes outside Swansea. The key was paying for the land as homes were sold, and finance was raised from the French Bank Societe Generale. Alas, after prolonged delays in raising funds, the first homes were on sale in the 1980s recession, and the experience taught me the importance of phasing the infrastructure, and not relying on predicted cash flows! A volume house-builder took the scheme over, and completed it as the market rebounded. It is therefore vital to raise funds for longer periods than the normal property or business cycle, which is around 11 years.

My second attempt was to set up a property trust, or more precisely an unauthorised property unit trust, to invest in buildings let to small firms in the London area. Founded with the support of CIPFA Services, it succeeded in tapping local authority pension funds, starting with £5m from the Greater London Council.  We went on to raise many millions more, and acquired a good portfolio of properties. Significantly pension funds need to invest in freeholds and these are few and far between.

The London Small Business Property Trust went on to perform better than any other, but the advisors to the pension funds we served decided that equities were going to perform better than properties, and so we  had to ‘close end’ the fund, sell off the properties we had laboriously acquired, and return the investments. The experience showed the value of setting up management companies to run pooled funds, but also the limitations of part-time boards, however well chaired, as a more entrepreneurial approach was needed.  It also suggested the City puts its own interest first.

So how should we square the circle provided by these two authoritative reports? The liquidity and security that pension funds require could be provided through property unit trusts, such as REITS. But they need to invest in schemes where the land has been put in as equity, paid for out of the sales value. A more efficient approach to building, along with design for wider markets (such as elderly home owners down-sizing) should make the numbers add up again. Local authorities need to take the lead once more, as the best are starting to do, and  seek to replicate what their continental counterparts have been doing for decades.