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Pension fund money could plug gap in social housing
Simon Bain - Herald Scotland - 7th October 2010

The Scottish Government is in talks with UK pension funds in an attempt to line up a £1 billion-a-year investment in social housing, to fill the gap left by the banking and public sector cash squeeze.

Housing Minister Alex Neil, in a keynote address to the National Association of Pension Funds’ (NAPF) annual conference in Liverpool yesterday  appealed to the UK’s most influential money managers to invest in infrastructure, beginning with a social housing sector underpinned by £900 million a year of rental income.

Scottish ministers have been working with their counterparts in the Welsh Assembly on an approach to pension funds that they hope will lead to the creation of special purpose vehicles which would enable direct investment into Scotland’s £8bn social housing sector.

At Holyrood, the Finance Secretary, John Swinney, has said he sees pension funds “making a valuable contribution to long-term investments in public infrastructure”, while at Westminster Vince Cable, the Business Secretary, is said to be looking at a plan to issue bonds linked to social housing, transport and green energy infrastructure, targeted at the funds.

But the dialogue on social housing is the first tangible sign of potential interest from pension funds.

Mr Neil will told the NAPF conference that the sector has more than 200 housing associations of all sizes, from Glasgow Housing Association to small rural bodies, but as an investment they meet pension funds’ requirements.

“It is very high-quality housing, generally in better condition than parts of the private sector,” a Government source commented. “It is backed up by substantial investment plans … and associations and their lenders benefit from significant public sector investment from the Scottish Government – the bulk of which goes to help fund new homes for social rent.”

He added: “The squeeze on public finances will impact on the delivery of social housing in Scotland.”

The minister will stress that social housing is “similar to utilities”, backed by effective regulation, and underpinned by predictable rents which have risen ahead of inflation and are supported by housing benefit. They are “ideal as a basis for a fixed-income investment”, he will say, with sound financial ratings from the ratings agencies.

He will also stress the opportunity for an “ethical investment” – in bodies representing 260,000 homes or more than 10% of all Scottish households, who are major investors in their local economy.

The search for new cash comes against a background of strong demand for new homes, as demand shifts from private to social housing as a consequence of the downturn, but amid pressure on other lenders and investors. Over the next 25 years, the number of households in Scotland is projected to increase by an average 19,000 a year.

Mr Neil told The Herald: “We have talked to some pension funds behind the scenes with a degree of detail. Inevitably the pension funds jointly with either ourselves or the housing associations would need to create some kind of special purpose vehicle.”

He said the issuing of bonds had not been ruled out, and any model was up for discussion, adding: “Ideally, I would like to get £1bn a year for each of the next five years to invest in social housing in Scotland.”

The minister said the funds were said to be looking for a return of RPI plus 1%. “That is certainly within the ballpark of what we can guarantee in terms of return, and there is no shortage of demand if you look at the waiting list … we need probably 100,000 new houses.”

Mr Neil said the latest edict from the Financial Services Authority on mortgage borrowing seemed likely to restrict even further the availability of finance for first-time buyers, and the Government would ideally like to attract some of the investment into shared equity housing.

He said: “There are very few examples of pension funds investing in social housing in recent times. We have got to encourage them to look at this seriously.”

See also:
Mortgage crackdown could shut generation out of house market
Government £200m plan to buy unsold homes for council housing
Study warns of 'age of austerity'
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