Kensington and Chelsea Council’s pension fund is pouring hundreds of millions of pounds into commercial property in a controversial bet, much like many global retirement funds are dumping or dumping their property holdings.
Located in one of Britain’s wealthiest boroughs, the £1.6bn scheme has so far invested in various properties around the country, including the Morrisons supermarket site in Hampshire and the Travelodge hotel site in Hampshire. It has spent around £150 million over the course of a year and a half. The grounds of the Audi car showrooms in York and Milton Keynes.
The surge in spending comes after the plan, which has 10,000 members, was funded by reducing its exposure to equities and quadrupling its target asset allocation from 5% to 20%.
“The property we’re buying is good and we’re not looking to make an exorbitant profit,” said City Councilor Quentin Marshall, chairman of the scheme’s investment committee, referring to the Audi showroom. He described the site as “a very good investment.” .
“Most of our investments have been or will be after the price drop last year, so overall the new environment is a net positive for us because we can buy at lower prices,” he added. .
Kensington & Chelsea, the London borough where Grenfell Tower is located, came under severe criticism after city council abandoned the building after a fire in 2017 killed 72 people.
Betting on commercial real estate has proven costly in the past for city halls. The government banned local governments from buying investment property in 2020 after a nearly £7 billion spree left many people heavily indebted. Pension schemes were not subject to the ban, as they are administered separately from the host municipality and are legally obligated to invest for maximum return.
Kensington and Chelsea’s move comes at a time when many investors are reducing their exposure to real estate. Bank of America’s monthly survey last week showed fund managers cut allocations to commercial real estate to their lowest levels since the 2008 financial crisis.
Retirement funds around the world are lowering their expectations of their real estate holdings as rising interest rates and banking turmoil hit the sector. Calstars and Calpers, the nation’s largest public pension plans, recently said they expected a downgrade of their real estate holdings.
But Kensington and Chelsea have a 20% target allocation to commercial real estate, significantly higher than their peers, the City Hall Fund, which typically holds about 5% to 10% of those assets.
Phil Triggs, Director of Treasury and Pensions 3 at Westminster City Council, who coordinates the investment operations of four London City Hall pension funds, including Kensington and Chelsea, said the fund would be funded by a “shift of 15% or more”. said. was transferred directly to assets.
Steve Hodder, a partner at actuarial consultancy LCP, described the change as “dramatic.” “There are very few corporate pension schemes buying real estate and most of them are considering how and when to exit,” he added.
Marshall said he doesn’t think a 20% allocation to real estate is “high”, saying, “All local council funds with lower real estate allocations have lower funding ratios than us, and even worse performance than we do. I am,” he added.
Kensington and Chelsea intend to build around £300m of holdings in 2018, with the ambition of having up to a fifth of their portfolio in direct holdings, Mr Triggs said.
Speaking at a World Pensions Board event in London this week, Triggs said the rent from recent property purchases (including contracts with other UK pension schemes to reduce assets) could add to retirement schemes “significantly.” It provided a source of income,” he said.
“This is a very successful strategy as it has allowed mature pension funds to deter inflation through real assets and ensure cash flow reaches positive territory,” he said.
