Brickonomics

Figuring out trends in housing, construction and property


Has the Government really got a blockbuster growth plan on the stocks?

Brian Green

The Government it seems has found the answer to the shortfall in funding for construction. It’s called “pension funds”.

Naturally we didn’t know pension funds existed, other than through vague references to them as joint owners of a black hole.

Amazingly we hadn’t already spotted their massive pool of funds that were ripe for the picking and ready to fill the depleting funding pot for infrastructure and housing.

So, if I read the press coverage fairly, it’s well done George and the boys and girls at the Treasury. Thanks to their star performances, ably supported no doubt by cameos role from Vince and his team, we seem to have construction growth in the can.

Growth Plan II: Back with a vengeance, will be coming soon to a despatch box near us soon.

The rumours suggest that this £50 billion production looks set to cheer hearts of downbeat construction folk in these desperate times. Good on ya! We need some good news.

Well that is what it looks like if you believe the rumours.

The reviews seem to suggest that this new epic was inspired by the experiences of brave bands of Canadian pension funds managers.

The story seems to go that while flaccid and uninspired UK pension funds fled to buy gilts the frontiersmen running the Canadian pension funds struck out on a different path – investing in infrastructure and real estate.

I checked various documents and yes, the Canadians seem to have been leading the charge in investing in infrastructure along with the Australians and Dutch.

Data produced by the Pension Investment Association of Canada (PIAC) – a member organisation – shows that since 2006, when infrastructure was first listed as an asset class that it measured, investment has risen from 2.40% of the total assets of its members to 4.15%. Real estate rose in the asset mix from 7.2% to 8.86%.

The total values now stand at $89.9 billion for real estate and $42.1 billion for infrastructure.

Now we are being coaxed into believing that with judicious pressure asserted by the UK Government the dam is set to burst allowing for a flood of long-term investment from pension funds into UK infrastructure and housing. Not peanuts either, we hear. £50 billion keeps popping up.

Well back in the non-celluloid world, less colourful though it is, there are a few points that need answering and one that needs making.

The point that needs making is that £50 billion will just about cover three years of the hole left by the retreating public sector funding for construction. If this £50 billion is spread over 10 years it is far from impressive given the funding gap, private and public, that seems to be facing the industry.

But it is the questions that these reports seem to have opened up that is so irritatingly confusing.

What has been stopping the UK pension funds, or any other overseas pension fund for that matter, investing more in UK infrastructure or housing in the past? And what can be changed to encourage them now?

The truth is talk of institutional investment and pension fund cash going into housing and infrastructure has been a hot topic for years. The Treasury and various other bits of Government and quasi-government have been on the case well before Mr Osborne was made key monitor to the Exchequer.

The barriers to engaging pension funds in investment have been evident for some while. Most not surprisingly seem to revolve around risk.

In fairness pension funds have been fairly significant investors in infrastructure although not necessarily directly, for example they hold stock in utilities.

But pension funds are cautious beasts and they are well aware that it is far less embarrassing to screw up your investments as a herd of sheep than screw them up as a lone wolf.

So the thought is that once you can coax a few in and create various investment templates, then others will follow.

To get pension funds to invest more directly in, say, infrastructure projects or build-to-let seems to have been the holy grail ever since it became apparent that sufficient traditional funding was lacking if the nation’s perceived needs were ever going to be met.

There will be irritating administrative and regulatory barriers that the Government can sweep away. Some have been removed already and others are being considered.

So, barriers to institutional investment in build-to-let housing such as the stamp duty rules on multiple purchases have been removed. And we can expect to see the rules surrounding real estate investment trusts (REITs) shift a bit.

There is no doubt that the investment climate – weakening returns in other safer assets – is making pension funds look more favourably at investing in the built environment. The fit is pretty good and the time is as right as it has ever been.

There are clearly problems, which can be overcome, with some of the infrastructure projects over how the value is captured – roads are good examples.

And what pension funds want to see are stable streams of returns. This presents problems too as returns are often heavily influenced by the regulatory framework within which, say, utilities operate.

There are ways that the Government can find to reduce these risks and also reduce the risky bits associated with constructing the infrastructure and housing.

But the problem might then becomes one of privatising profit and socialising risk. After the banking crisis how much more or this economic asymmetry is the public prepared to stomach before it suggests that you might as well do it in the public sector?

The flip side to that question is how expensive is it to privatise that risk? Well the experience with PFI proved rather awkward politically.

Naturally there is the rather obvious option of displacing existing public sector investment in infrastructure and housing with pension fund loot. This would then free lots of cash for investment in new construction. But there is not that much of the national infrastructure left to be privatised.

And there is one question I keep chewing on. If we can print money to buy gilts, why not just print money to buy bonds in infrastructure and housing and leave the pension funds to buy the gilts?

Clearly there are more questions than answers here.

What I am intrigued by is what is it that the Government is going to release to the public that will match the blockbuster billing that Growth Plan II has been getting ahead of its release?

  1. Readers' comments

  2. Tom Chance 16 November, 2011 | Reply

    I thought you might find these extracts from recently London Assembly Planning & Housing Commitee meetings where institutional investment came up in discussions about the private rented sector, we heard some interesting evidence about its potential:

    Vincent Rampulla from the National Landlords Association:

    “On an institutional basis they might be pitching at more the top end of the sector. If you are talking about quality issues and demand issues, and what we are saying is the issue is right at the middle to lower end, the real question has to be will the institutional investment offer any solutions for that because the business models do not stack up in this? I have not seen any evidence from the pension companies that it will meet those needs.

    “The second thing is that, within their business model, there needs to be a certain churn of properties. They need to be selling properties as well as delivering properties. I have not seen any business models that are purely on rent only investment in the same way as social rented. That is an issue for people wanting to see a growth in institutional investment.”

    Full transcript: http://www.london.gov.uk/moderngov/mgConvert2PDF.aspx?ID=4330

    Alan Benson, Head of Housing at the GLA:

    “Institutional investment is a very small part of the market in other countries. It is a bit of a myth that it is out there in a large way. It is not the answer to our supply issues in London, necessarily. Where it does work is usually where they have a very small social rented sector and institutions tend to deliver for that market with some Government support. Aviva launched their £0.5 billion fund on 3 November 2009 and they have people paid stratospheric salaries to work this up, yet they failed to do so in nearly two years. For institutions the return is insufficient; the rents are not high enough. The private rented sector does not give them a big enough annual return in order to fund institutional investment. It gives an individual landlord a sufficient annual return to pay his mortgage and accumulate an asset over time. But financial institutions do not want to accumulate assets; they want an annual return and rents are not high enough. That is why every institution wants some degree of public support. They are looking for free land rent guarantees, etc, and the state cannot do it because that would be state aid to the private rented sector, and that is what screwed up the PRSI initiative.”

    http://www.london.gov.uk/moderngov/mgConvert2PDF.aspx?ID=4849

  3. Brian Green 18 November, 2011 | Reply

    Tom

    Many thanks for posting your comment. It provides great insight into how informed people see this issue.

    Brian

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