Local authority pension fund co-invests with impact funds into local housing

“The first phase was me running the agency [TELA] to really to prove that operating model, because it is tight, and that if you can do it managing other people’s properties, then when you own your own properties obviously you’ve got full control over that which you don’t when you manage other people’s,” she said.

She added: “I have very tight KPIs to make sure that things are delivered and consistently delivered day in and day out, so for example our arrears being arguably the most important from a finance point of view, our arrears KPI is that we would never breach three per cent, and we never have in over five years, for all properties under management for the agency.”

The new £7.5m of investment will be used to expand EHC’s portfolio of owned properties. The company has ambition to acquire 100 properties per year for the next decade, adding to the 60 properties it already owns; a further 20 are due to complete soon.

Teesside’s pension fund was its “ideal and first choice” as an investor, Ms Keegans said. “We hoped it would tick the kind of boxes that the pension fund would be looking for, and obviously for us as well it’s the visible social impact that we deliver across Teeside as well in increasingly challenging times for people.”

Investing locally

For Teesside Pension Fund, the £5m allocated to the EHC forms a small part of a circa £4bn portfolio largely comprising investment into equities, private equity funds and some commercial property. However, Nick Orton, head of pensions governance and investments at the fund, explained that it reflects a more recent commitment to investing more locally.

“Our pension fund committee for a lot of years deliberately didn’t invest locally because of potential concerns about conflict of interest and perhaps political issues around local investments,” Mr Orton said. “But they took a conscious decision three or so years ago to invest up to five per cent of the assets of the fund in local investments, but only if they met the returns need of the fund and the sort of risk return ratio that we’re looking for.”

The EHC marks the second local investment the fund has made, following a recent deal with a start-up bank based in Middlesbrough, which Mr Orton described as the “higher risk end of the spectrum – more risk, more return”.

By contrast, referring to its investment into the EHC, he said: “We immediately saw that ethical housing wasn’t going to provide enormous double-digit returns, but it would provide quite a lot of security because it’s property based and also it’s based on property in the North East, specifically in Teesside, which although it fluctuates in value like all property, it doesn’t tend to go up or down as much in value.”

Across its pension fund portfolio as a whole, Teesside’s assets need to deliver a long-term return of just below 4.5 per cent on average, which it achieves through a mixture of higher and lower-yield-producing assets. The investment into the EHC is in ‘preference shares’, Mr Orton said, which will see it achieve roughly this target (4.5 per cent return).

The pension fund expects to retrieve its money in full, or “potentially a little more” in around 20 years’ time, but is not expecting “meaningful capital appreciation” from the portfolio, Mr Orton said, again because of the nature of values in the local housing market.

All three investors – Bridges, BSC and Teesside – have entered on the same terms for a 20-year minimum investment period, and it is envisaged that the EHC would continue beyond this date.

Mr Orton added that the council “gained a lot of confidence” from the track record that the EHC and Bridges were able to demonstrate, together with Ms Keegans’ longer experience with TELA, in terms of dealing with the detail of acquiring and managing a portfolio of properties and managing tenancies on a day-to-day basis.

Mr Orton said that the added concentration risk of investing into one project, as opposed to a managed private equity fund spread across several different projects, was contained by the small scale of the investment.

The nature of the investment itself is also seen as lower risk compared with the fund’s investment into equities, which led to “huge volatility” in the fund at the start of the year. At the end of March 2020, the fund was worth £3.73bn, its accounts show.

“That’s about £300m or £400m less than it was at the end of the previous December, and that’s because of the volatility in equities,” Mr Orton said, adding that values have now returned to around £4bn.

The non-financial elements of the investment were also a factor. “The great fit for us was obviously the ethical side – if we can improve the lives of the people of Teesside through our investments that’s fantastic, but also the geographical area was a great fit,” he said.

Asked to what extent environmental, social and governance (ESG) and/or impact investment approaches had played a part, Mr Orton said that the fund has a responsible investment policy and does take ESG factors into account, but is not driven by them when seeking out investments.

“We wouldn’t specifically go out looking for things that deliver impact investment, or we don’t currently do that anyway, but it was interesting that we’ve sort of fallen upon something that does that.”

Commenting as the investment was announced, Scott Greenhalgh, chair of Bridges Evergreen Holdings, said the EHC offers a “compelling solution to the growing challenge of housing need on Teesside”. He added: “The results so far speak for themselves, and we’re delighted that this proof of concept has now catalysed further investment to support Carla and her brilliant team.

“The local insights and connections of the Teesside Pension Fund, coupled with the specialist property and social investment expertise of Big Society Capital, will be hugely helpful in taking this concept to scale.”

Hear Carla Keegans join other stakeholders to discuss ‘Connecting capital to communities’ on day three of the Social Housing Annual Conference, taking place 1-3 December. For more information and to book, click here.