Kensington and Chelsea council’s pension fund is investing £1.6bn in commercial property with circa £150m spent to date, including the purchases of a Morrisons supermarket in Hampshire, an Audi car showroom in Milton Keynes, and a Travelodge hotel in York.

The investment came after the scheme increased its target property allocation from 5% to 20%, funded by cutting exposure to equities.

Councillor Quentin Marshall, chair of the scheme’s investment committee, explained: “Kensington and Chelsea’s target allocation to commercial property at 20% is substantially higher than its peer town hall funds, which typically hold around 5% to 10% of these assets.

“We were looking for contractual returns, which both property and fixed income offer. We wanted to maintain low levels of risk while generating a high return. And in our view, very blue-chip property offers that possibility. Our property holdings are about providing diversification to an otherwise all-equity portfolio.

“The alternative asset classes were not attractive, and we did not believe they would have allowed us to generate the source of return to meet our obligations at the lowest possible cost to the taxpayer.”

Data from Preqin, the investment data firm, shows that last year, global average asset allocation for real estate from private sector pension funds and public pension funds was 9% and 10% respectively, compared to 9% for both in 2021.

Matthew Swynnerton, partner at global law firm DLA Piper, said: “Prior to September 2022, indications were that pension fund appetite for real estate investment was on the rise, due in part to high yields and ESG factors.

”However, the shock of the mini-Budget in late 2022 has led pension funds to focus on diversification and liquidity, which has seen them reduce their exposure to real estate. 

“Against this backdrop, and the fact that few occupational pension schemes invest in real estate anyway, Kensington and Chelsea council’s pension fund approach seems to buck current trends,” he added.

Karen Thrumble, head of local authority pension performance analytics at Pensions and Investment Research Consultants (PIRC) said the Local Government Pension Scheme (LPS) has always been a large property investor but noted: ”In the latest year investment into property across the LGPS has been becoming more diverse with some funds now holding residential property, long lease property funds and community housing.”