Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Social Housing

Infrastructure, Social Housing & Property Investment Conference

Robert Gardner

27th June 2013

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Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013 2

Managing the End Game

Greatest Challenges Facing Pension Funds

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

The Seven Steps to Full Funding

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Design an efficient

investment strategy

Destination for agile

hedging strategy

Transparency to make

timely decisions

Articulate clear objectives

and constraints

Mission Statement

To help our clients achieve full-funding with the minimum level of risk

CLEAR GOALS &

OBJECTIVES

ACCESS TO LDI

HUB

LIQUID ALPHA & BETA

STRATEGIES

LIQUID & SEMI-LIQUID

CREDIT STRATEGIES

ILLIQUID CREDIT

STRATEGIES

ILLIQUID ALPHA & BETA

STRATEGIES

ONGOING

MONITORING

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013 4

LDI 1.0

Liability Immunisation

LDI 2.0

The LDI “Manager”

LDI 3.0

Holistic ALM

Managing the End Game

Integrating Social Housing into your LDI Strategy

Interest rate swaps

Nominal gilts

Inflation swaps

Index-linked gilts

Gilt repo and TRS

Swaptions

Unfunded asset exposures

Corporate linkers

Sophisticated option overlays

Flight Plan Consistent Assets

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

Seven Steps to Traditional Asset Classes

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Step

(2)

LDI

(3)

Liquid α & β

(4)

Semi-Liquid Credit

(5)

Illiquid Credit

(6)

Illiquid α & β

Collateral

Management Equities Corporate Bonds Infrastructure Debt Insurance-Linked

Hedging Multi Asset Asset Backed

Securities Social Housing Debt Private Equity

Active LDI Sovereign Bonds High Yield Direct SME Lending Infrastructure Equity

Gilts Commodities / CTA Leveraged Loans Mezzanine Finance Unlisted Property

Currencies Emerging Market

Debt Distressed Debt

Hedge Funds with

Longer Lock-Ups

Liquid Hedge Funds Commercial Real

Estate Debt

Long Leases /

Ground Rents

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

The Role of Liquid and Illiquid Credit

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Corporate

Bonds

Direct

Lending

Corporate

Linkers

Infrastructure

Debt / Long

Leases / Social

Housing

Infrastructure Debt / Social Housing

Gilts

Cash

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013 7

Secured Leases Social Housing Infrastructure Ground Rents

LDI 3.0

LDI 1.0

LDI 2.0

LDI 1.0

LDI 2.0

Managing the End Game

Integrating Social Housing into your LDI Strategy

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013 8

• Access to high-quality, inflation-linked cash flows offering attractive real yields .

• Accessing such returns in traditional ways has become increasingly difficult in the recent market environment.

• Pension funds will also take into account

additional considerations such as the investment structure and the risk/return profile of each specific investment.

Benefits for Pension Funds

• Opportunity to access a new and potentially large source of financing with a long-term horizon.

Benefits for Housing Associations

Win/Win Opportunity

Managing the End Game

Why Invest in Social Housing?

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

Investing in Illiquid Assets

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Source: Red Manager Forum Survey

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Social Housing is a form of low cost, rental housing

typically provided by local councils and non-profit

organisations called housing associations.

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• Housing associations issue inflation-linked debt

secured on a pool of housing units to finance activities

• Interest payments are matched by rental income that is

typically increased yearly at RPI + 0.5% (the legislation

indicates this may change).

• Illiquidity gives rise to a premium return over publicly

traded bonds by the same or similar issuers.

• Enjoys a large degree of government support, with

rental payments often heavily subsidised

• Combines social responsibility with returns

Social Housing investment features

Background

• Traditionally financed by state support and bank loans

• The financial crisis imposed losses and higher capital

requirements on banks, limiting their ability to lend

• The government has proclaimed an era of fiscal

austerity and is reducing spending

• This ‘funding vacuum’ has given pension funds an

opportunity to step in and provide financing

Managing the End Game

Background to Investing in Social Housing

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Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

Investing in Social Housing

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Pension Fund

Investor

Registered Social

Landlords

Capital

Interest payments

Rent

Payments

(linked to

inflation)

Capital used

to fund and

maintain

social houses

Indicator Private Social

Proportion of household reference persons (HRP) < 35 yrs old.

50% 20%

Size of sector (number of households)

2.5 mm 4.0 mm

Mean weekly gross incomes (HRP + partner)

£493 £247

Mean weekly rent £136 £72

Median length of time in current residence

1.5yrs 7.8yrs

Proportion of tenants receiving housing benefit

21% 62%

Proportion of HRPs working full time

61% 22%

Benefits

Secured Lending

LDI Hedging

Implicit UK government & regulatory support

Socially responsible investment

Source: Housing in England 2007-08 Report published in Sep-2009 by Communities and Local Government

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

Managing the End Game

Accessing Social Housing through Pooled Opportunities

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Range of Assets:

• Social Housing

• Infrastructure

• University Assets

• Commercial Assets

• Ground Rents

Returns Enhancing and Liability Matching Assets (REaLM) Social Housing Fund

Range of Assets:

• Social Housing

Asset/Fund Features:

• Maturity: 20-50+ years

• Inflation linked

• Illiquidity premium • Typically equity stake

• Higher public sector

exposure

Asset/Fund Features:

• Maturity: 30-40 years

• LPI linked

• Illiquidity premium

• Debt stake

• Focus on Registered

Social Landlords

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013 13

Source: Canaccord Genuity, Redington

Social Housing

Risk and Return Profile

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Mix of Social Housing Type

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Social Housing

Regulatory Concerns

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- Recent political discussion has been erring towards government legislation that will change the inflation linkage of

the rental income from social housing from RPI to CPI. The repercussions of this change are twofold:

• Ratings agencies may decide to downgrade social housing debt.

• Investing in social housing is no longer a direct hedge for pension fund liabilities.

- European legislation has changed the way the government pays grants and provides support in the form of housing

allowance. Instead of paying the Registered Social Landlord (RSL) directly some of the money is now paid to the

tenant. This creates a risk that the money does not reach the housing association and therefore presents a risk to the

borrower.

Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk

Contacts

Robert Gardner

Founder & Co-CEO

Telephone: +44 (0) 20 7250 3331

robert.gardner@redington.co.uk

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Disclaimer For professional investors only. Not

suitable for private customers.

The information herein was obtained from various

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Private & Confidential Infrastructure, Social Housing & Property Investment 27 June 2013

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