Not all of London’s infrastructure challenges are down to a lack of capital

A lack of domestic capital?

PIC is not alone in its commitment to domestic infrastructure – across the UK’s pensions and savings system we estimate there is £200 billion of capital poised for deployment in infrastructure projects. Rather than a lack of available funds there simply is a shortage of investable projects. Additionally, the buyout market generates substantial asset pools with long-term liabilities, necessitating long-term investment strategies. This approach aligns perfectly with the government's objective for the pension sector. So, what is holding these projects back?

Partly, we see this as being related to the UK’s BANANA ('Build Absolutely Nothing Anywhere Near Anything') economy. But we also think the social value generated by these projects is frequently underappreciated by those nearby. Regeneration initiatives contribute immensely to local communities, creating skilled jobs, apprenticeships, improved healthcare outcomes, and economic boosts for local businesses. Communicating these benefits effectively is key to overcoming opposition and unlocking the potential of these projects. While some long-term investors and developers are beginning to change the narrative around these developments, more must be done to help local authorities bring forward these initiatives.

At PIC, we believe there is a need for a new era of public-private partnerships, given the constraints on government finances. The resistance to the development of vital infrastructure projects is often fuelled by narrow regulatory remits.

In 2022 we made an £83 million investment in partnership with the London Borough of Newham ('LBN') to fund the construction of 161 homes, as part of LBN’s housing strategy, which seeks to actively manage the financial and social implications of the area’s housing shortfall. The investment funded the regeneration of a brownfield, industrial site near London City Airport to provide homes for local families, with up to 50% of the properties designated as affordable housing.

The project is a key part of LBN’s housing strategy, through which they plan to acquire large scale development to provide much needed affordable homes. The strategy will not only provide secure, good quality housing but also provide LBN with a rental income which helps address their overall funding shortfall. LBN will receive a stock of well-maintained, environmentally friendly properties at the end of a 50-year lease term for £1. The Regeneration Lease structure provides PIC with long-term, inflation-linked cashflows which will be used to pay the pensions of its policyholders over the coming decades.

Projects funded using the Regeneration Lease model offer benefits to all stakeholders throughout their lifecycle, for example through increased employment and significant spend in the local economy in the short-term during construction.

In 2023 PIC invested £50 million in Kingston upon Thames to develop 125 affordable and shared ownership homes. The development was made possible through a £4.9 million grant from the Mayor of London’s Affordable Housing Programme.  This was the first investment as part of a partnership with London Square Group ('London Square'), an award-winning residential developer operating in Greater London, and Square Roots, the independent affordable housing provider set up by London Square. 

One-third of the apartments will have the rent set at a level  the Mayor of London views as ‘genuinely affordable’ and will be let to local residents who are most in need (London Affordable Rents). The remaining apartments will be shared ownership homes which will allow many medium income households to fund the deposit needed for full homeownership. This is increasingly difficult through traditional routes, despite many potential residents having stable employment. Construction of the main buildings is now under way. The development is expected to be completed in November 2025.

We believe that the new government should prioritise the mobilisation of the UK’s long-term savings to support housing and infrastructure development. While progress has been made in this area, there is a risk that government-backed investment could crowd out private investors with a lower cost of capital. While investment objectives would be met, the broader economy would be worse off. A more sensible approach would be for the Government to take on the project risks that the private sector cannot, using its resources to create social value rather than competing on price with private investors.