The London Pension Fund Authority will provide 85% of the funding needed to build a 200-home property development in east London.
The Greater London Authority has selected the LPFA, which held £5.2bn of pension assets as of March 2014, as the delivery partner to finance the 0.6-hectare housing development, Pontoon Dock, in Newham.
Bouygues Development and Grainger plc will work with the LPFA and GLA on the development.
The project will include the construction of 137 private rented sector homes, 42 affordable rented homes and 31 shared ownership homes.
This comes after the LPFA proposed earlier this year that LGPS funds should come together to create a £30bn “citizen’s wealth fund” to invest in infrastructure and housing projects.
An LPFA spokesman said: “This is an exciting project which fits with LPFA’s asset liability model approach to investing which is matching our long-term liabilities with long-term assets.
“The LPFA is currently assessing the optimal capital structure within which to undertake this project. This is an ongoing negotiation and the exact details of this structure are now under discussion. This is currently market sensitive information and is not generally released.”
He said the property development would add to the pension fund’s holding of illiquid assets. Illiquid assets are those which, because investors cannot withdraw their holdings before a certain time period, pay out a higher return, or ‘illiquidity premium’ than standard assets.
“Every investment is considered on the merits of its return characteristics and the fit with our liability profile. We have an overall strategic allocation to illiquids but adopt a flexible approach within this category. This investment would increase our allocation in this asset class,” said the spokesman.
LPFA chief executive Susan Martin said: “Investing directly in the redevelopment of the Pontoon Dock site will not only deliver essential housing for London, but will also provide LPFA with the attractive, liability matching, long-term returns we need to provide for our pensioners.”
London mayor Boris Johnson said he wanted, through this and a separate development in Canning Town funded by Thames Valley Housing and Linden Homes, to “entice more institutional investors to come forward and invest in quality homes for Londoners”.
The deal marks increasing LGPS interest in investing in the housing sector to access long-dated investments which also help to solve problems faced by local authorities. So far, these have included investments in property development to reduce housing pressure and in small business lending to boost local growth.
In April this year, the Greater Manchester Pension Fund invested £25m in a joint venture with Manchester City Council and the Homes and Communities Agency to build 240 help-to-buy or shared ownership homes in the area.
In July, Investing 4 Growth, a group of six LGPS funds (West Midlands, Greater Manchester, West Yorkshire, South Yorkshire, Merseyside and East Riding) committed £152m to an impact investing project, which will invest in housebuilding, infrastructure, small business lending and sustainable technologies.
The LPFA administers parts of the LGPS on behalf of 20,000 employers working for 160 local authority, third sector and private sector organisations, paying benefits to 40,000 pensioners.
At its latest triennial valuation, from March 2010 to March 2013, the LPFA had cut its deficit from £870m to £483m.