Agenda item

Report of the Executive Director Corporate Services.

This report builds on the Investment Strategy review that was agreed in July 2023 by this Committee and the affordable housing allocation of 5% (£97m). The London CIV affordable housing sub-fund has been reviewed compared to the Fund’s investment expectations.

Consideration was given to the report of the Executive Director Corporate Services.

The Head of Treasury and Financial Services introduced the report, which set out the Affordable Housing proposition in detail and recommended investment into the London CIV Affordable Housing fund. It was noted that Committee Members had recently attended a training session that focused on investment in affordable housing.

Isio Investment Consultants, Andrew Singh and Hermione Rigg, took the committee through the report in detail, advising that the Committee had agreed a new strategy in July 2022 and the report provided an outline of Affordable Housing as a new asset class. Key points were made as follows:

• Residential property was an alternative to commercial property.
• Returns were designed to produce income via rental payments and to increase capital value.
• Returns were inflation linked and offer diversification from traditional asset classes.
• Investments in this type of fund benefitted from being defensive and less economically sensitive.
• There were some risks associated with this investment type.
• The sub-fund would invest in the CBRE UK Affordable Housing Fund and the Octopus Affordable Housing Fund.

Responding to questions the Isio Investment Consultant provided the following information:

• Typically, with a new investment of this type, there is a lag in early years due to lack of established assets in the portfolio and investor capital was used for development. As assets became operational, performance then stabilised and improved. The CBRE fund was established in 2018 and performance was broadly in line with expectations of a fund of that age. Each development became less impactful as the fund matured.
• Specific data on performance would be provided to the Committee in writing.
• It was important to have a balanced sub-fund. CBRE had established a portfolio of assets which could provide a stabilised return, but it would take longer to invest due to higher demand. Octopus, on the other hand, was a new fund so had the benefit of being able to accept investments more quickly.
• This type of fund had previously been very London centric as this was where the demand was, so returns were often higher when investing in this area.
• However, the market was developing quickly, and opportunities for investment were distributed across the country, and CBRE’s current investment profile was roughly 30 – 40% in London, 20% - 30% in the Southeast and the remainder was invested elsewhere.
• In terms of risks associated with inflation linked income, it was noted that there was a contractual obligation to increase rental charges in line with inflation. However, when interest had reached 10 – 11% it was not considered appropriate to raise rents this high, so a cap was introduced but this was not considered to have an adverse impact on the fund.
• It was in the Fund’s best interest to ensure that properties were constructed and managed to a high standard, due to the reputational risks involved with poorly maintained properties.
• Roughly 60 – 70% of residential properties within the fund would be newly built, and 30 – 40% of stock would be existing buildings that had been retrofitted to meet current standards.

The Committee commented that affordable housing was a positive investment and were pleased that there was an increased focus on the social impacts of investments.

Therefore, it was

RESOLVED –

THAT the Committee:

      i)         Agree that the Fund invest £97m in the London CIV affordable housing sub-fund;

     ii)         Agree that the funds invested with Partners Group are allowed to mature;

   iii)         Agree that any balance on the July 2023 Investment Strategy Review is to come from the Legal and General Passive global portfolio; and

   iv)         Delegate all matters relating to this resolution to the Executive Director Corporate Services.

ACTION BY: Executive Director Corporate Services