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An overhaul of UK infrastructure is long overdue. Whether it is a greater supply of better housing or renewable energy to support the green transition to Net Zero, the UK’s infrastructure ‘wish list’ is long and, under traditional financing parameters, prohibitively expensive.
In many cases around the country, potential development costs are greater than the value of the completed product. This dynamic restricts investment in areas that desperately need it because they are simply economically unviable.
However, long-term institutional investors, like PIC, have demonstrated that we are able to invest in these areas, driving economic growth and delivering job creation, using long-term regeneration leases in partnership with Local or Combined authorities.
These instruments can unlock investment in forgotten areas of the UK and kickstart a process of regeneration to transform local communities. Under a regeneration lease, the local authority enters into a long-term (typically 40 to 50 years), index-linked lease, and has the option to buy the asset from PIC for £1 at the expiry of the lease.
From PIC’s and our policyholders’ perspectives, this structure plays an important role in delivering our purpose: to pay the pensions of our current and future policyholders. Everything we do is aimed at delivering on this purpose. Our investment strategy is carefully constructed to deliver robust, index-linked cash flows that match all future pensions payments, so we can be sure our policyholders receive their pensions every single year.
James Agar, Head of Long Income, PIC
These instruments are certainly not a one-sided affair; regeneration leases are mutually beneficial to all the parties involved. Local Authorities, and potentially other investment grade organisations such as Universities and NHS Foundation Trusts, gain access to significant levels of capital to deliver their strategic objectives and to stimulate local economies, whilst also achieving a profit rent which grows over the period of the lease.
Due to set maturities and pricing in public credit markets, sourcing private assets such as regeneration leases has become a key part of PIC’s investment strategy to obtain the necessary liability matching cashflows. The best way to find defensive investments with long time horizons is to invest in assets with social impact. This includes sectors such as renewable energy, social housing, urban regeneration and education. PIC has around £11 billion invested in these sectors and they generate huge social value for society – good for both our policyholders and the communities around the UK which benefit from new development.
Investments through regeneration leases often act as a catalyst for wider regeneration and can breathe new life into whole communities by unlocking investment in the long term. Our investment into the Wirral Waters project is a perfect example of this, where alongside Peel L&P and Wirral Metropolitan Borough Council, we are developing more than 500 homes, with a 20% affordable element, in an area of limited viability. Our cornerstone investment of £130 million is the first of a 30-year project to transform an area of former dockland into a thriving new neighbourhood, with additional housing, 20,000 permanent jobs, and new training and educational facilities.
A similar project is underway in the London Borough of Newham following PIC’s investment of £83 million through a regeneration lease. It will fund the construction of 161 homes on a brownfield, industrial site near London City Airport to permanently re-home local families. Up to 50% of the properties are intended to be affordable housing, generating considerable social value.
Regeneration leases are not the only innovative private asset structure used by PIC to match the liabilities of our policyholders. In August 2021, we concluded a unique investment with the London Borough of Bromley to help alleviate local emergency homelessness. The £67 million investment is being used to purchase up to 300 affordable properties outright. This will significantly reduce the Council’s current cost of emergency nightly accommodation, by eliminating reliance on hotel rooms, for families in need of temporary accommodation across the Borough.
PIC views these kinds of instruments as a vital tool for infrastructure investment, providing an opportunity for genuine public and private sector partnerships to bridge the viability gap. These are examples of the financially secure but creative investments in long-term, private assets that PIC makes to safeguard the pensions of our policyholders for the decades to come.
This article first appeared on portfolio-institutional.co.uk
Head of Long Income, PIC
+44 20 7105 3641
