The UK private rental sector (PRS) has the potential to provide attractive infrastructure investments for Local Government Pension Scheme funds, Invesco Real Estate has found.

Following amendments to the government’s pooling proposal in July 2016, LGPS funds will be looking to increase their strategic allocations to infrastructure in a move to diversify investment allocations to lessen risk.

While LGPS funds in England and Wales are required to publish their new Investment Strategy Statements by 1 April 2017, access to beneficial infrastructure products is not straightforward for many funds. Invesco Real Estate has predicted that very few funds will be able to offer infrastructure as an asset class until after April 2018. Nonetheless, it has been noted that real estate investment opportunities could offer a considerable avenue for LGPS funds to access infrastructure assets.

According to Invesco, UK PRS assets could meet the new infrastructure investment criteria and provide considerable benefits to LGPS funds. These include: durable physical assets, long life and low risk obsolescence, identifiable and reliable cash flow, revenues isolated from the business cycle and competition, and low return correlations to other asset classes.

Invesco Real Estate senior director residential investments John German, commented: “These investments should provide risk-adjusted returns over the long term to their investors as they are substantially backed by durable physical assets which are designed to have a long life and low risk of obsolescence. We believe the UK PRS has characteristics which are becoming more and more relevant to LGPS funds as they become increasingly mature, offering access to high quality UK based infrastructure assets.”

Furthermore, LGPS super pool operators are undergoing a period of considerable pressure to successfully manage the collective assets of 89 individual LGPS funds. Eight operators are to oversee total LGPS funds’ assets of more than £200bn. These super pools must be formally established by 1 April 2018.

BNY Mellon international head of pensions and insurance segments Paul Traynor, said: “The UK Government has set a challenging timeline for the implementation of LGPS reforms and with little more than a year to go until the deadline, many super pool operators have yet to clearly define their operating structures and assign key responsibilities to team members.

“Many super pools are still having their plans reviewed by the Government and it’s imperative that operators address this as a matter of urgency. The Government will be keen to understand how the pools designate roles and share expertise, and agreeing internal organisational structures and service provider requirements are precursors to progressing with other important tasks on the road to consolidation.”

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