UK - It is logical for pension funds to invest in property, says the UK's Association of Property Unit Trusts (APUT).
“Attractions include asset allocation diversification, stability of returns, high levels of income and wage inflation matching characteristics.
“But substantial investment in residential property by UK pension funds has not occurred in recent years: the threat posed by harmful regulation of the private-rented residential sector was a perceived risk and there has been a concern that the residential property management industry is incapable of managing a portfolio efficiently.
“However, the risk of regulation has since subsided, and there are now several organisations capable of providing quality property management at a reasonable price.
“With the removal of these obstacles, there are many reasons for pension funds to consider investment in the private-rented residential sector:
- Performance from residential property has a different pattern to that of the main commercial property sectors, and risk-adjusted returns are enhanced by an allocation to residential property alongside commercial property.
- Residential property investment provides an even better match for wage inflation than commercial property, since with residential property there is a closer link between the individual tenant paying rent and the pension fund recipient.
- Residential property investment has provided less volatility in performance than commercial property.
- The planning constraints upon residential development have resulted in the level of household additions being below the level of household formation since the mid-1980s. The sector benefits from a favourable systematic balance in which demand exceeds supply.
“In spite of the strong strategic case for a pension fund allocation to residential property, much has been made of the supposed over-pricing of the UK residential sector in recent months based on house price to earnings ratios, especially in London and the South East.
But there are a number of reasons for considering the pricing of UK residential property in a different light:
- The house price to earnings ratio is not the most significant influence on future price movements. Even if housing is considered solely as an investment for the owner-occupier, the ratio of house prices to gross disposable income is a more relevant measure. This ratio is close to its long-term average, and is 30% below previous peaks for the UK as a whole.
- Housing is not exclusively an investment for owner-occupiers, it can also be considered as a consumable good that enhances quality of life. If the cost of housing is reviewed in these terms, mortgage interest payments as a proportion of real disposable income remain relatively low. Now we are in a low inflation, low interest rate environment, higher prices are more supportable.
- The balance of supply and demand has tightened over the past decade and anticipated demographic changes alongside a restricted development pipeline suggest that the imbalance will tighten further still.
- The pattern of house prices versus historic trend in London and the South East is not indicative of other regions of the UK where the scope for further increases in the price of housing appears greater.
“Until recently, the opportunity to invest in a pooled fund able to capture economies of scale and diversification benefits did not exist. But the case has become compelling.
“And now there are institutionally managed funds that specialise in pooled residential investment management, it is becoming ever more difficult to ignore the sector.”
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