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Would you want your pension fund investing in housebuilding?

We desperately need more affordable homes, but plans to fund construction with local authority pension cash are built on shaky foundations, Lorna Bourke warns.

Would you want your pension fund investing in housebuilding?

Recent proposals from the Future Homes Commission (FHC) to use local authority pension fund money to kick-start growth with a housebuilding initiative are well worth considering, and they are likely to win widespread support. But would you want your pension fund investing in residential housebuilding?

Nobody disputes that more homes are desperately needed, or that such a move would create thousands of new jobs. Households are being created at a rate of 250,000 a year, while new homes have been built at an average rate of just 150,000 a year over the past decade, and new starts are currently running at just 100,000 a year. 

There is currently a requirement for over a million more homes to be built.

Are the returns high enough?

Research by the FHC showed that pension funds are desperate to increase the return on their investment portfolios. They have suffered declining contributions as a result of redundancies and increased payments to those retiring, along with stagnant investment returns over the past 10 years.

But there are problems with using pension money to fund housebuilding: the most important of which is the return required by the pension fund. 

The FHC found that pension funds’ minimum is a return of between 7% and 10%. The current average return on buy-to-let in London and the South East is 6% at most – and this is the return on private sector, open-market rentals, not subsidised local authority housing or ‘affordable housing’ where the return is lower.

These are gross yields, too. Once management expenses, insurance, repairs and maintenance are taken into account the net yields are even lower.

Sector shunned by institutional funds

This is one of many reasons why investment in residential housing, as opposed to commercial property, represents just 1% of institutional funds’ investments, according to a recent report from the Investment Property Forum. This compares with as much as 47% in the Netherlands, 15% in France and 13% in Germany. 

UK life-insurance companies and pension funds have for years been busy selling off what residential property they held. 

The FHC proposals acknowledge that individual local authorities have neither the expertise nor the size to invest in residential properties. Therefore, the FHC’s proposed Local Housing Development Fund is envisaged as a pooled, independent mutual investment fund of £10 billion out of the £180 billion currently held in local authorities’ pension funds.

According to the FHC the London Pension Funds Authority (LPFA)’s requirements, if it were to put pension fund money into housing, would be a total return of 8% to 10% a year from income and capital growth, an initial return in line with the return on 10- to 15-year gilts (currently around 3%) increasing in line with inflation, and a clearly defined date for the fund to mature of not more than 10 years. 

LPFA would be looking for ‘sustainable, high-quality investments, period tenancies within the life of the fund, market rents increasing in line with the retail prices index, and management and strategies to minimise voids and maintain the properties’. This is quite a tall order.

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20 comments so far. Why not have your say?

tim boles

Oct 30, 2012 at 12:50

please see my letter published in Yesterday's Daily Telegraph:

Dear Sirs

One of the very few good ideas of Gordon Brown in the last government was the plan to allow people to hold residential property (for commercial purposes) as an eligible pension asset. It was done away with at the very last moment.

Many believe that property is the surest way to beat the QE – inflation trap and is “Safe as Houses”!

In the Isle of Man we adopted such an approach with a cap of 50% of scheme value. Why doesn’t the UK follow suit?

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Chris Clark

Oct 30, 2012 at 12:53

It would depend on the different schemes on offer, short term tenancies, long term tenancies, local situations, purchases.

I wouldn't put all of a pension into it, but why not a part of it on a reasonable scheme?

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Oct 30, 2012 at 13:14

are we not looking at this the wrong way 1 Million more affordable homes needed - to cope with the mass immigration the last 13 years under labour.

The sooner we get net immigration down the better the situation will become. We are overcrowded already.

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Geoff James2

Oct 30, 2012 at 13:21


Fixing housing supply is one side of the problem. The real requirement is to fix the housing demand.

The above along with all the other ideas are great except they only work for a short time. What do you do then when the money or land has run out.

Fixing demand is the priority, then tidy up the mess. Fixing demand includes

1) Change expectations - In Japan they manage with a 6-mat room for a family of 4. This may be too far for the UK but why is a house/flat the expectation

2) Remove advantageous benefits payments for adults with Children. If working families can't afford children then those on benefits should not gain an advantage

3) IVF should be privately funded (if it is available at all). IVF and environmental concerns for saving the planet are alien to each other

4) Health tourism and economic migration to the UK needs to be addressed and reduced.

Just something to think about.



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Rob Walker

Oct 30, 2012 at 13:44

What a remarkable coincidence !! Here we are with one organisation keen to get planning laws relaxed so they can build more 'affordable homes' and their investors are the pension funds of the very authorities who who would approve such planning. The whole arrangement stinks.

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Oct 30, 2012 at 13:52

Dear Lorna,

Thanks for confirming that residential propert is a terrible investment at today's over-inflated prices.

Would you care to repeat the message in all your future articles on the subject? No, thought not, you'll go back to the tireless (tiresome) ramping at the next opportunity......

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Chris Clark

Oct 30, 2012 at 14:04


I seem to observe that more business gets done in a crowd than done when there is no-one there.

Tell me please, how exactly would your comment of "The sooner we get net immigration down the better" assist grow the economy?

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smoking gun

Oct 30, 2012 at 14:15

Initially this may sound a brilliant idea but on second thoughts it sounds more t like a (Robert) Maxwellian scheme. Local Authorities and the likes plundering the pension funds takes them out of the control of those who work the pension funds giving powers to plunder and squander to local councillors, many and possibly most of whom have no idea about the economics of pension funds or even house building.

In the end many more economic houses will need simply to house all those whose pensions will have been eaten into by poorly managed councils and similar organisations. If the government forces this into law, pensions will ultimately become worthless.

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Oct 30, 2012 at 14:59

UK demand for housing has been low since the FINANCIAL CRISIS really hit in Spring 2009.

Remember Demand is only present where people have the ability to pay for a house (or anything else for that matter). For most that means raising a mortgage.

Yet mortgages have been fiercely rationed by lenders (mainly through imposition of very large deposits) since the Banks themselves went bankrupt in October 2008, only to be rescued by everyone else's (our) REAL money when the Government had to jump in.

Given that there is very little housing DEMAND just now, any major new housebuilding programmes will have to be for social or other housing to rent.

I am not at all sure whether the public sector Pension Funds, very shrewdly managed as they are by rather astute and conventional Boards, would be interested in that prospect!

This looks like another cock-eyed idea thrown out by the present Government that will not see the light of day.

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Oct 30, 2012 at 16:50

As the article says, it is all about return. rental returns at the moment are too low for pension funds. Advisor is confusing the ability to buy a house with the need for somewhere to live. Housing demand is increasing, but in the rental sector. There may well be a time in the future when rental returns make 10%. The new mortgage regulations will have the effect of pushing up rentals. Its not rocket science, as the man from the enforcement agency said.

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Oct 30, 2012 at 16:56

Lorna is absolutely right and has concentrated on the most important part in all of this, the pension funds' returns. What all large (and small?) pension funds need is growth, not income. As I keep saying, it's all money, and the pensioner doesn't care in the slightest where his pension comes from, so long as it arrives. Growth gives the pension funds a cushion, income just sweeps the problems under the carpet.

The reason why Gordon Brown withdrew, at the last minute, residential property as an asset for SIPPs was because it was pointed out to him that it would take property prices out of the reach of first-time buyers. Now that the banking crisis has brought that about anyway, there is a good deal of sense in letting people use 50% of their SIPP fund on residential property. SSASs (the occupational equivalent) now let the schemes buy commercial property, even from the scheme members, provided it is at a third-party arm's-length valuation, and the world hasn't stopped.

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Dr Jimbo

Oct 30, 2012 at 18:35

Lorna's remarks about returns are the nub of the issue. The problem we face in the UK is that the majority of our existing housing stock is old, poorly built and needing major renovation to bring it up to modern standards. But renovation costs often exceed the cost of new build because they attract VAT and modern building regulations mean older properties need far more work than is apparent at first glance. This is not an attractive investment environment.

But new homes are far too small with little storage space and their prices are far too high for many young buyers. This is because our planning system will not allow new houses to be built on greenfield sites and therefore landowners want huge prices for postage stamps with planning permission. Worse still, house building is now dominated by just 8 building companies that own most of the available building land and to make a profit after giving away land for "affordable homes" that are no really affordable at all thay have to cram as many houses as possible on the land that has been released. - In Cardiff a 53 acre brownfield site has just been released for 700 houses! The RIBA recently placed a paper before the Government called "The Case for Space" - its worth a read because it illustrates how far behind Europe UK housing has become and the problems it creates.

Anyone investing in domestic housing is faced with overpriced land costs, conversion costs that are crippling and a planning system that refuses to respond to the need for major change in attitude and responsiveness. Why do planners insist on keeping roads full of bungalows for example - an outmoded "street scene" when owners and developers could create two or three storey buildings that are efficient and attractive?

I would be delighted to invest part of my SIPP in my own house because it would improve my standard of living. I would also be happy to put part of it into helping my children buy their own homes. I would not elect to use it in a Local Authority housing scheme but I might try Buy-to-let. Above all I am fed up with Government and the Establishment telling me that my life's savings cannot be used as I see fit. I would never save for a pension again and I would never advise anyone to do that either. Pensions should belong to the saver to do with as they please. Not some Local Authority Pension Plan, not some Annuity provider, not some Government actuary besotted by GAD rates.

We need a real movement in this country to release land for DIY builders and to stop the gainsay planning departments putting a block on anything imaginative or different. Then we might see an investment opportunity that pension funds would find attractive - whilst people are still required to place their savings in someone else's pockets that is.

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Oct 30, 2012 at 19:30

Hear hear Dr Jimbo.

I see the problem has much deeper. The basic economic premises behind our system are fundamentally flawed. Our politicians do not have a sufficient grasp of fiscal strategy. Note I did not say economic strategy as their grasp of fiscal management inevitably does not translate into economic matters. It is my view that socialism (spending other peoples money on white elephants) inevitably leads to welfare democracy, where the greatest voting power lies in those on the most welfare benefits.

Our economy is structured around perpetual growth beyond the (aging) demographics of the population to sustain it.

This is clearly evidenced by the housing market, where inefficiencies, fraud, graft and taxes has resulted in a median house price for the UK of £239,000 (if you believe the BBC here

compared to a average median after tax household income of just £15,700, if you believe the ONS here

It seems to me that if we talk broad policy, you cannot leave out sink holes around the country. I am all in favour of focussing on a narrower population base that is affluent (as most readers of this site are) but I would point out that the enirety of the working population earns less than £37,500 per annum gross of tax.

Here's a nifty site:

Maybe we just have to get used ot the idea that this is a poor country with the current leadership spending billions upon billions on things that are not very useful or valuable at all.

I would prefer not to, but 40 years of working has convinced me that our electoral system leads inevitably to leadership of the welfare deomcracy I mentioned before.

There is no metric for determining Government success or failure. Simply saying over and over "well they were useless, let's try them" is doomed to failure. Certainly the house price multiple of 15 times (or even 8 times if the BBC is up to its usual "Jimmy Savile" standard) is not a metric for country that has the basis for fairness and equity.

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Bill lawson

Oct 30, 2012 at 21:00

The system of large building companies buying land at too great a price and sitting on it until they can increase its usable value has caused house prices beyond the reach of the average buyer , It is now impossible to by a building plot at a sensible price like I did many years ago and built my own house which I still live in . An appointed house building organisation,by the housing association made £140 million pounds profit perhaps some of this could be sunk back into the building programme and leave our pension funds alone..Houses are for living in not collateral

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Dr Jimbo

Oct 31, 2012 at 11:08

The impact of Government drawdown allowances on Self Invested Pensions (SIPPS) and their equivalents is little understood, by the way. Because the Government is manipulating Gilt index yields to such a low level (currently about 2.5%) a 68 year old can only drawdown £60 per £1000 of pension held in his pension pot.

The drawdown rates (GAD rates) at this Gilt yield rate rise over time from £60 to £141 per £1000 by the time he is 85. Even if the money is just left as idle cash, the calculations show that as the pension pot depeletes he can draw less and less each year despite the GAD rate rising. This means he still has over £18,000 in his pension pot at 85; and as the drawdown rate is frozen from then on he cannot live long enough to withdraw all his pension moneys.

If the pension pot is invested at 6% per annum he ends up at 85 with over half his pension pot still in place - nice gift to the pension fund providers if he then dies!

So if you were to invest your pension in a Local Authority buy-to-let scheme that promised a 6% return and they were able to achieve that in the overpriced market we now live in, you would be gifting half your pension pot to the Local Authority when you die. No wonder there is interest in this proposal!

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Oct 31, 2012 at 11:38

Dr Jimbo,

Ack!!!! Is the £18,000 whats left from £100,000 at zero (ish) on cash and there will be over £50,000 left if it grows at 6%?

How can anyone ever reduce a pension to close to zero then, in either draw own or annuity? (Assuming 25 years in retirement?).

does this mean nobody can ever get their money back?

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Dr Jimbo

Oct 31, 2012 at 12:30

Yes, the £18000 is whats left over if interest on the pension pot is zero and £50,000 is left if it grows at 6%. With the GAD rates at 2.5% and the drawdown limits as set in the tables for a gilt rate of 2.5% you can never get your money back!

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Dr Jimbo

Oct 31, 2012 at 12:41

Oh - and if gilts hit 6% (woopee!) the maximum drawdown rate for an 85 year old man is £169 per £1000 in the pot. So it still takes him until he is 91 to get the last £1000 pounds out assuming its invested at 0%.

Isn't the Government generous?

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Oct 31, 2012 at 12:51

I just threw up in my mouth a little trying to mix too many expletive deletives. So if I am single and want to simply draw down my capital at 4-5% for 25 years I can't.

I wonder if the greying population can form its own poltical party that focuses only on its needs and can form parts of future coalition governments.

I can think of half a dozen issues on which it can build an electable platform.

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Nov 01, 2012 at 12:50

The only bit of my pension fund that's doing ok at the moment IS the bit that's invested in housebuilding (TW). Am thinking of splashing out on more builders.

Some good points here. Geoff James, agree totally with your remarks about reducing demand !!

As far as supply goes, we've suddenly had a "brownfield windfall". No need Dr J to plough up all those cute (and treasured) bungalows when there are dozens ? hundreds ? of obsolescent town centres. The internet shopping revolution is shrinking the need for shops, so let's speed up the rate of conversion / redevelopment into much-needed housing !

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