UK residential property should be included in local government pension schemes' (LGPS) multi-asset portfolios, said a residential property fund manager.

According to Christopher Down, Hearthstone Investments chief executive, there is a strong investment case for including UK residential property in multi-asset portfolios, and there will continue to be long-term demand for this asset class.

There are also political advantages. If all 89 LGPS allocated 2.5% of their fund to residential property, like the London Borough of Islington did with its £800m fund in 2012, then 20,000 homes could be built, he said.

At a Public Sector Pensions conference this week, Down said: "Behind the scenes, we are seeing more investors coming to the market than is reported in the press.

"It really is here. We've been talking about an increasing institutional investment in residential for a while, and for the last 12 months we've seen that delivered with active deals in the market, including our own."

Among a number of benefits Down said that residential investment is the UK's largest asset class, it's outperformed other assets over time, it's the best on a risk adjustment basis, and it is more liquid than commercial property.

He also mentioned that there has been a "substantial increase" in the private rented sector in the market. In 2001 only around 10% or 11% of homes were private rented, but this figure is now 20%.

Despite some fears that the long-term demand for residential property may decrease, Down said that a shift would have to come back "an awfully long way" before there is any kind of problem with regards to this particular asset class.

Regarding the political benefits to investing in residential property, Down said: "I'm not going to let the political tail wag the investment dog, but there are significant nice-to-have benefits if you also buy the investment story for residential property."

Councillor Richard Greening, deputy leader and executive member for finance and performance at Islington Council, said investing in residential property was a good way for the council's fund to improve its investment performance and to diversify its portfolio and that it was a great way to build new homes and create more jobs.

He said that the fund decided to change its strategy from investing in equities to residential to seek higher returns with lower risk.

At the conference, Councillor Greening said that one of the reasons why LGPS have not invested in this asset class is because "no one else is doing it".

But he said: "Anything new is always going to be risky. There will be surprises along the way."

Later on he added that he does not see the Government readdressing the imbalance of demand in this area for a while, and then said: "I think we feel secure enough in bricks and mortar."

In a statement Councillor Greening said: "We look forward to other pension schemes joining [the TM Hearthstone UK Residential Property Fund] and to starting a mass movement which will help to increase the supply of much needed new housing in our country."

Responding to a concern raised which questioned why councils were investing in private housing rather than social housing, Councillor Greening said: "We would like there to be a possibility of pension fund assets contributing to social housing. But the list of barriers that the advisors flag up even for this relatively straight forward simple private rented sector fund are quite significant.

"So in a sense we need to get over the first barrier and prove that the concept will work, and then look to how we can begin to really focus on how to invest in additional new units being delivered and moving it more towards the social sector, which is ultimately where we would like to see more investment occurring."

Concerning a question about LGPS directly investing in their own boroughs, James Walton from Allenbridge Investment Solutions, said: "Each opportunity has to stand on its own feet and be assessed independently.

"You don't necessarily have to exclude investing in your own borough, but it shouldn't be the main driving force."

First published 26.04.2013

monique_simpson@wilmington.co.uk