The Kensington & Chelsea pension fund is betting heavily on the property

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Kensington and Chelsea City Council pension fund is pouring hundreds of millions of pounds into commercial properties in a controversial bet, just as many global pension funds dump or depreciate their property holdings.

The £1.6bn scheme, located in the UK’s wealthiest borough, has so far spent around £150m in the last year and a half on a range of properties across the country, including a supermarket site Morrisons 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 program quadrupled its target real estate allocation from 5% to 20%, funded by cutting exposure to stocks.

“The properties we’re buying are good, we’re not looking to generate excessive returns,” said adviser Quentin Marshall, chair of the program’s investment committee, who described the Audi showroom site as “a very, very blue investment.” -chip”. .

“Most of our investments have occurred or will occur as a result of last year’s price declines, so overall the new environment is clearly positive for us as we are buying at lower prices,” he added.

Kensington and Chelsea is the London borough where Grenfell Tower was located, and the council has come under heavy criticism for neglecting the property, after a fire in 2017 killed 72 people.

Commercial real estate bets have proven costly for municipalities in the past. In 2020 the government local authorities prohibited from buying investment property after an almost £7bn spree left many heavily in debt. The pension schemes were not subject to the ban as they are run separately by the host local authorities and have a legal obligation to invest to get the best returns.

Kensington and Chelsea’s move comes as many investors reduce their exposure to the property. Last week a monthly Bank of America survey showed fund managers had cut their allocations to commercial real estate at its lowest level since the 2008 financial crisis.

Global pension funds are lowering their expectations for their real estate holdings as rising interest rates and the banking turmoil bite into the sector. Calstrs and Calpers, two of the largest public pension plans in the United States, recently said they expect a downgrade of their real estate holdings.

However, Kensington and Chelsea’s target allocation for commercial property, at 20%, is substantially higher than matching town hall trusts, which typically own around 5-10% of these assets.

Phil Triggs, director of treasury and three borough pensions at Westminster City Council, who coordinates investment operations for four London City Council pension funds, including Kensington and Chelsea, said it was funded by a shift of ” upwards of 15%” of the scheme’s allocation to global shares transferred into direct ownership.

Steve Hodder, a partner at LCP, an actuarial consultancy, described the move as “a drastic change”. He added: “There are very few company pension schemes that are buying up property, and most are considering how and when to exit.”

Marshall said he didn’t think the 20% property allocation was “high,” adding, “Those local council funds with lower allocations to property — they all have lower funding ratios than we have, and they’ve performed quite poorly.” to us”.

Kensington and Chelsea first expressed an ambition in 2018 to hold up to a fifth of the portfolio in directly held properties, with plans to build holdings to around £300m, Triggs said.

Speaking at a World Pensions Council event in London this week, Triggs said rent from recent property purchases, including deals with other UK pension schemes offloading assets, had led to an “income stream significant” for the pension plan.

“It’s moved the mature pension fund firmly into cash-flow positive territory with real assets providing inflation protection, so it’s a hugely successful strategy,” he said.