Five UK local authority pension funds form cornerstone investor group

The Chancellor’s recent budget looked at the government’s focus on the UK’s housing issue; in particular, focusing on encouragement for homebuilding, an acknowledgement of the concerns associated with rising rents and an announcement of plans for a consultation on barriers to longer tenancies in the Private Rented Sector.

This has led to Hearthstone Investment Management Limited announcing the first close of its first fund – Hearthstone Residential Fund 1. This will see a group of five Local Authority Pension Funds become cornerstone investors.

The fund will invest in UK regions, purchasing clusters of houses and low-rise blocks in areas of solid rental demand in UK regions.

Hearthstone Residential Fund 1 (HRF1) has received commitments of £100m from a five local authority pension funds, acting as a group of cornerstone investors in a ten-year closed-end vehicle, which will invest across the UK regions where there is, or the possibility is likely of, strong rental demand.

The cornerstone investors include Derbyshire Pension Fund, Nottinghamshire Local Government Pension Fund, Staffordshire Pension Fund, Teesside Pension Fund and West Midlands Pension Fund.

HRF1 will focus on building and actively managing portfolios with clusters of houses and low-rise apartment blocks in areas where there is good rental demand, sure to appeal to families and young professionals. This is in contrast with a selection of other residential funds, which specifically look at large blocks of flats in city centres. Acquisitions will include both bulk purchases of newly built stock from house builders and standing investment assets.

It is anticipated the fund will aim to deliver a projected annual yield net of all costs of 4%, supplemented by capital growth. The final close is targeted at £200m, set for November 2018.

HRF1 will be advised by Hearthstone Investment Management Limited, a 50:50 joint venture between the senior management team and Hearthstone Investments Plc.

Hearthstone Investment Management’s management team, who are investing alongside the local authority pension funds, consists of three partners: Richard Otten, Director of Asset Management, Andrew Smith, Chief Investment Officer and Cristoforo Rocco di Torrepadula, Director Investor Relations.

Cristoforo Rocco di Torrepadula, Partner, Hearthstone Investment Management Limited, commented: “We see an opportunity to focus on regional centers of economic growth which are undersupplied with good quality rental accommodation.

“This is also an opportunity to bring institutional quality management to what has been to date a generally poor quality consumer product. We are particularly delighted to be working with group of local authority pension fund investors.”

Philip Atkins OBE, Chair of the Staffordshire Pensions Panel and Leader of Staffordshire County Council, said: “This is an opportunity for funds to make an investment that firstly meets our investment requirements, but also contributes in a small way to the housing need of the country.

“The growing demand and undersupply of quality housing, in particular in the private rented sector, makes residential property more resilient to economic downturns and attractive to long term investors.

“The Hearthstone Residential Fund 1 will provide a reliable income stream over the next decade while the underlying assets will act as a hedge against inflation.”