Institutional investors’ focus on UK housing

Opportunities with duration like this are rare to find in public and private debt markets. Consequently, institutional investors like PIC are increasingly exploring living assets such as retirement living, affordable housing, Build-to-Rent (“BTR”), Purpose Build Student Accommodation (“PBSA”) and urban regeneration to source attractive, defensive, noncorrelative cash flows at scale.

To date, PIC has invested more than £13 billion in these assets. Not only do they provide tangible social value up and down the country, but they have also historically kept pace with or outperformed inflation, generating cashflows to pay our pension liabilities.

This approach ensures that resources are not just consumed in the present but are managed in a way that secures long-term benefits for both current and future generations. Backing the pensions of older generations with investments that benefit future generations exemplifies the essence of intergenerational transfer.

Miller’s Quay, the £130 million cornerstone investment of Wirral Waters, is PIC’s first urban residential long income scheme and is a testament to the role that partnerships between long-term investors and local authorities can play in regenerating previously overlooked parts of the country. We hope that the regeneration lease structure used to finance Miller’s Quay can be adapted across a range of sectors and projects for both local and combined authorities looking to unlock funding for regeneration schemes for their areas.

“Throughout its construction, Miller’s Quay has seen the creation of considerable social value through the provision of jobs and education, and we look forward to marking the completion of the remaining four sections of construction over the next six months. PIC has invested £5.9 billion so far in built environment projects around the country, and we are aiming to invest considerably more as our business continues to grow and we seek to back the pensions of our policyholders with long-term, secure cashflows.”

Q: What factors/areas are particular to investment across different asset classes? How does it differ from other housing investments?

Senior Living

Over 11 million people in the UK are of pensionable age, and this figure is projected to rise by more than four million by 2045. Addressing the need for safe, comfortable, and purpose-built accommodation for older people is a significant challenge - and opportunity - for policymakers, planners, developers, and investors. This demographic shift presents a burgeoning field for investment in senior living, making it an increasingly attractive market for institutional investors.

Despite the sector's impressive growth in recent years, there remains considerable untapped potential as the population continues to age. Compared to other countries, the UK is behind: only 1% of UK residents over 65 live in dedicated retirement accommodation, whereas 6.5% do so in the USA and 5.5% in Australia. Expanding retirement communities in the UK to accommodate 5% of the pensionable population could unlock an estimated £125 billion in value.

Nevertheless, significant barriers hinder investment in this sector, particularly the inadequate provision for older people's housing in local and national planning policies. Efforts to address these challenges include initiatives like the Older People’s Housing Taskforce, which is working to resolve supply-side issues in this space.

Working alongside best-in-class investment partners such as Octopus Real Estate and developers such as Audley and Elysian,  PIC is at the forefront of embracing new ideas and re-imagining real estate investment in this rapidly growing alternative residential sector.

The increasing demand for retirement living creates favourable market conditions - with long-term planning horizons and consistent and predictable sources of revenue. So, this sector fits perfectly within PIC’s purposeful investment strategy.

Affordable Housing

Private investment in housing associations plays a crucial role in addressing the UK's affordable housing shortage. By investing into affordable housing we can support the creation of high-quality homes that generate significant social value.

These investments not only enhance the availability of affordable housing, but the strong regulation of the sector also ensures that developments meet stringent standards, ultimately contributing to the well-being and stability of communities by protecting some of the most vulnerable individuals in our society.

Over the past decade PIC has partnered with more than 60 registered providers across the UK and has provided more than £3bn in innovative financing solutions since 2012.

Build-to-Rent ('BTR')

Institutional investors like PIC are particularly attracted to the BTR sector due to its track record of long-term financial stability and lower risk profiles. BTR developments typically involve the construction of large scale residential assets designed specifically for rental, catering to the growing demand for high-quality rental housing.

These properties provide reliable income streams through  the rents received, making them appealing to investors looking for defensive, robust returns.

The predictable nature of rental income, coupled with the growing trend of renting over homeownership, particularly among younger generations, ensures a continuous demand, reducing the risk of vacancy and income volatility. Furthermore, BTR assets are usually managed by professional firms that maintain high occupancy rates and manage tenant turnover efficiently, contributing to the sector's attractiveness for long-term investors.

PIC is established in the BTR market with c1,800 homes currently built or under construction across the UK, and with ambitions to further commit capital into this space.

Higher Education Funding

Private investment in UK universities is vital to sustaining and enhancing the nation's educational infrastructure.

With a longstanding commitment to excellence, our investments into accommodation assets of the UK’s educational institutions are a key element of our investment strategy. These investments create environments where future generations can thrive. By funding state-of-the-art research facilities and specialist student accommodation, private capital plays a crucial role in ensuring that UK universities remain at the forefront of global education.

Q: How is the market doing generally? Is it an attractive area for pension investment at the moment? Why/why not? What are returns like?

The current landscape of property development in the UK is increasingly challenging, driven primarily by the pressures of inflation and significant shifts in public markets since the Truss administration and subsequent LDI crisis. As inflation rises, the cost of construction and materials escalates, impacting the viability of new housing projects. Furthermore, the material repricing of  gilts—a reflection of broader economic uncertainty—has had profound implications for financing development.

These economic factors are creating a tougher environment for developers seeking to navigate the complexities of the UK housing market.

Regeneration Projects and the Local Council challenge

PIC remains committed to investing in the UK's housing and infrastructure. Large scale, brownfield regeneration projects are crucial for our country as they concentrate and connect our cities, boosting national productivity and breathing new life into unloved area of the UK.

Despite the high demand from long-term investors like PIC, who seek stable returns to match our policyholders liabilities, there simply aren't enough projects being developed.

The challenge isn't a lack of domestic capital ready to support these ventures; it's the scarcity of viable projects to invest in. Both long-term structural issues and short-term market conditions lead to this situation. A major structural challenge is that local authorities often lack sufficient internal resource to handle large-scale development proposals as their focus is rightly on providing core services. This limitation, among other factors, has significantly reduced the number of projects and investment opportunities available. Short-term factors, like inflated asset prices, also play a role, though these are expected to normalise over time.

To address these challenges, we have focused on how we can assist local authorities in bringing more investable projects to fruition. One of the avenues we've explored is through the Purposeful Finance Commission (“PFC”), chaired by PIC’s CEO Tracy Blackwell. The PFC identified two additional areas for improvement: streamlining the grant application process to avoid competition between councils and reforming the planning system to make it more efficient and cohesive.

Additionally, local authorities are facing increasingly tight budgets due to declining central Government funding , insufficient council tax revenue, and rising service costs, particularly in adult social care. This situation has worsened recently due to inflation, leading many councils to make tough financial decisions. Many have had to cut services or use  reserves, especially as high construction costs and expensive Public Works Loan Board (“PWLB”) borrowing have stalled regeneration projects.

To address funding gaps, some councils are now turning to alternative finance options beyond traditional borrowing. Instead of relying on central government funds, raising council tax, or expensive loans, they are seeking partnerships with institutional investors’. These insurers invest in long-term assets and can offer low-risk, patient capital, aligning their long-term interests with those of the councils. This collaboration can support urban regeneration, infrastructure projects, and essential services, driving economic growth and delivering significant social value.

Q: What environmental and social factors need to be considered when investing? What benefits do housing investments present on the social side? 

At PIC, we are major investors in UK housing and regeneration projects. We think that these investments are key to the delivery of social value and are essential in driving economic growth across the UK.

Over the next decade, we expect our sector to have up to £200 billion to invest in UK infrastructure, as we take on increasing amounts of pension scheme liabilities from defined benefit schemes. We see no shortage of domestic capital to support viable projects. There just aren’t enough viable projects to invest in.

Regeneration projects – broadly, but not exclusively defined as the development of built environment and infrastructure projects on urban brownfield sites – should be a key component of any plan to reinvigorate regional economic growth and raise Britain’s productivity levels.

So, why are so few of these projects getting off the ground? Partly we see this as being related to the UK’s BANANA economy  trap (“Build Absolutely Nothing Anywhere Near Anything” (or “Anyone”). But we also think that the social value generation of such projects is being underplayed.

Regeneration projects create significant social value for local areas, including skilled jobs, apprenticeships, improved healthcare outcomes, and economic inflows into local businesses.  We think communicating these benefits is key to helping overcome these challenges. Already some long-term investors, including the public sector, as well as private developers, are starting to change how they describe these projects. But more is needed to help local authorities successfully bring forward more of these types of developments.