Kensington and Chelsea council’s pension fund is pouring hundreds of millions of pounds into commercial property in a controversial bet just as many global retirement funds offload or write down their real estate holdings.
The £1.6bn scheme, located in the UK’s wealthiest borough, has so far spent about £150mn over the past year and a half on a range of property around the country, including the site of a Morrisons supermarket in Hampshire, a Travelodge hotel in York and the site of an Audi car showroom in Milton Keynes.
The spending spree comes after the 10,000-member scheme quadrupled its target property allocation from 5 per cent to 20 per cent, funded by cutting exposure to equities.
“The properties we are buying are good, we are not trying to generate outsized returns,” said councillor Quentin Marshall, chair of the scheme’s investment committee, who described the site of the Audi showroom as “a very, very blue-chip investment”.
“The majority of our investments have occurred or will occur following the fall in prices last year, so overall the new environment is net positive for us as we are buying at lower prices,” he added.
Kensington and Chelsea is the London borough in which Grenfell Tower was situated and the council came in for heavy criticism for neglecting the property, after a fire in 2017 killed 72 people.
Bets on commercial real estate have proved costly to town halls in the past. In 2020 the government banned local authorities from buying investment property after a near-£7bn spree left many heavily indebted. Pension schemes were not subject to the ban as they are managed separately from their host local authorities and have a legal duty to invest for the best returns.
Kensington and Chelsea’s move comes as many investors reduce their exposure to property. Last week a monthly survey by Bank of America showed fund managers had cut their allocations to commercial real estate to their lowest level since the 2008 financial crisis.
Global retirement funds are lowering their expectations for their real estate holdings as rising interest rates and banking turmoil bite the sector. Calstrs and Calpers, two of the biggest public pension plans in the US, recently said they expect their property holdings to be downgraded.
However, Kensington and Chelsea’s target allocation to commercial property, at 20 per cent, is substantially higher than its peer town hall funds, which typically hold around 5 to 10 per cent of these assets.
Phil Triggs, tri-borough director of treasury and pensions at Westminster City Council, which co-ordinates investment operations for four town hall London pension funds, including Kensington and Chelsea, said it had been funded by a shift of “upwards of 15 per cent” of the scheme’s allocation to global stocks moved into direct property.
Steve Hodder, a partner with LCP, an actuarial consultancy, described the shift as “a drastic change”. He added: “There are very few corporate pension schemes that are buying property, with most considering how and when to exit.”
Marshall said he did not think the 20 per cent property allocation was “high”, adding: “Those local council funds with lower allocations to property: they all have lower funding ratios than we have, and have performed rather less well than us.”
Kensington and Chelsea first set out ambitions in 2018 to hold up to a fifth of the portfolio in directly held property, with the intention of building holdings of around £300mn, said Triggs.
Speaking at a World Pensions Council event in London this week, Triggs said the rental from recent property purchases — including deals with other UK pension schemes offloading assets — had resulted in a “significant income stream” for the retirement plan.
“It’s moved the mature pension fund solidly into cash flow positive territory with real assets providing inflation protection, so it’s a hugely successful strategy,” he said.