The newly elected Labour government has announced a major pensions review, with the aim of enhancing investment, boosting saver returns and tackling fragmentation and waste in the system.
Focusing on the consolidation of defined contributions schemes and the £360 billion Local Government Pension Scheme (LGPS), a key priority is encouraging more pension investment into private assets across the UK to drive growth. A recent story by CoStar notes the potentially far-reaching implications of this approach for UK real estate investment and, at Kettel Homes, we strongly agree.
Pension funds have the inherent purpose to serve their members in achieving a financially secure retirement. There is also clear evidence that homeowners, on average, are in a better financial position than renters when they retire. Pension funds can make a vital contribution by investing in assets that prioritise the long-term interests of their members and the wider community, such as residential real estate. This would help both fund much-needed new housing and facilitate homeownership — two interconnected issues.
To put this into context, the national housing shortage is well known. The government has pledged to deliver 1.5 million new homes and revive the dream of home ownership. That ambitious target means constructing 370,000 homes annually compared to the previous government's 300,000 goal. Savills reports that 231,100 new homes were delivered last year, a 9% drop from 2022. According to ONS data, the UK has not delivered 370,000 completions since 1969. There is a considerable shortfall to fill, which can benefit from increased local investment. Meanwhile, the latest Census data shows that homeownership rates have fallen from 70% in 2010 to 65% today, further exacerbating the problem. If left unaddressed, these trends will disproportionately impact the the so-called ‘squeezed middle’ along with key workers and younger people, often referred to as ‘Generation Rent’.
Local investment can accelerate progress in these important areas by meeting housing demand, providing stability, and enabling homeownership, all of which boost local economies. These are urgent challenges, and our team is actively working to address them. As a rent-to-own platform focused on single family housing, Kettel Homes seeks to unlock home ownership and stimulate new housing delivery, starting with the Midlands, North West and South Yorkshire. We aim to help 10,000 families per year get on the property ladder.
Another priority for pension funds is ensuring the quality of investments to secure strong, risk-adjusted returns. Local projects should still undergo rigorous due diligence, and there is no suggestion that all investments should be directed into local assets. Rather, the aim is to allocate an appropriate, meaningful proportion. As with all pension funds, diversification is key, but this should include quality investments at a local level, particularly when they offer attractive, stable returns with lower risk and a socially responsible purpose at its core. Once a certain level of diversification has been achieved, the marginal benefit of investing further afield diminishes. In fact, most pension funds have a strong understanding of their local communities and investment opportunities, often judging these better than opportunities in distant markets.
Investing in the real economy and in assets that people use daily is a worthwhile endeavour and must be viewed through a holistic lens. Upgrading local infrastructure attracts new businesses, which goes hand-in-hand with delivering housing for employees. This, in turn, appeals to more companies, generates commerce, and boosts tax revenues, creating a virtuous cycle of economic growth that draws in more talent and investment. We are already seeing examples of this, such as South Yorkshire Pension Authority's place-based impact investment fund, whose local investments have attracted new companies, most notably BT Group's new office in Sheffield.
The Mansion House reforms were the initial impetus for opening up pension investment into private markets and, looking ahead and going one step further, there is a strong opportunity for pension funds, as well as the rent-to-own sector and the simplified road to homeownership that it offers, to address the chronic housing shortage and remove barriers to owning property. The private sector has an important role to play.
Creating impact in residential housing relies on local government supporting regional investment and encouraging pension funds to do the same. The LGPS investing in local economies is a positive step forward and could be transformational, bringing numerous lasting benefits to communities. We at Kettel Homes hope to be part of the solution.
This article was first published by CoStar.