Fund management heavyweight Robert Houston has called for a radical overhaul of UK institutional portfolios.
The former ING Real Estate boss and founder of boutique investment manager St Bride’s, said that institutions and pension funds should be investing in residential and overseas property.
His new strategy would see firms which control around £150bn of assets scrap the traditional benchmarks which designate up to 90% regional assets (see table).
St Bride’s UK Institutional Investment model advocates a broadly even split between London, regional and global property with an overlay of up to 20% residential and up to 15% invested in securities and derivatives.
Houston said that the strategy is “what we truly believe UK institutions and pension funds should be doing”.
The firm takes a “cradle-to-grave” approach to the residential sector, encompassing maternity homes, student accommodation and hotels as possible investments, although the bulk would be expected to comprise private rented flats.
Houston acknowledged the difficulty in persuading specialist advisers, such as Mercer and Aon – which he called the “gatekeepers to the UK pension funds” – to change the traditional balance of an institution’s real estate holdings.
He said: “The investment committees of the big institutions and pension funds need to be given support from all the key advisers, including consulting actuaries which try to match liabilities against assets, and view life over a three- to five-year cycle. That is their job, and it is difficult for them to recommend radical change because of that cycle, but they are key to persuading investors to invest in residential or abroad.”
Houston added: “That is challenging because they do have a responsibility, and it is hard for them to take a risk, but my judgement is that it’s time to take a risk, particularly on overseas and residential.”
Former ING REIM UK chief investment officer Ian Whittock applauded Houston for sparking the debate and that firms should not just follow the industry benchmarks without challenging them.
He agreed that the long-term total returns offered by residential investment are compelling.
However, he pointed out that entry price is critical to long-term performance, so timing is key to entering the current overheated housing sector.
The firm’s call for investors to move into the residential sector coincided with the government’s housing strategy published on Monday, which repeated its pledge to encourage more investors into the rented housing sector.
