Railpen: We don’t want to invest in ground rents anymore because ‘there is a consumer on the far end’

The boss of the railway workers pension scheme won’t be investing in ground rents anymore because the sector is too “emotive”, according to the website IPE Real Assets. John Chilman, CEO of Railpen which is being taken to court by the government over the £14.9 million remediation of 15-storey Vista Tower in Stevenage, Herts, said:

“This is one of the few asset classes we’ve invested in where there is a consumer on the far end, which makes [managing the asset] much more difficult. It makes it much more emotive.

“When you’ve got an institutional investor on the other side, or a corporate, it’s easier,” he told IPE Real Assets, which describes itself as “an indispensable source of intelligence for the global community of senior institutional real assets investors.

Mr Chilman continued:

“Would we invest in this again? I don’t think so.”

IPE Real Assets reporter Lauren Mills opens up her article published on 16 December 2021: “UK residential ground rent assets leased directly to consumers could become uninvestable for institutional investors after Railpen, manager of the UK’s rail transport pension schemes, revealed it is rethinking its strategy for residential investing after becoming embroiled in Britain’s cladding scandal.”

Railpen, through its investment vehicle Grey GR, started acquiring residential ground rent assets in 2017.

This is quite late in the day for pension fund investment, as ground rents investments are now dominated by private equity investment groups such as Long Harbour, E&J Estates, Wallace Estates, Regis and, of course, the deeply indebted Tchenguiz Family Trust, where ground rent incomes transfer via a debenture to Goldman Sachs founded – but no longer directly owns – Rothesay Life.

Most punters in the ground rent game hide their beneficial ownership behind nominees, usually offshore.

Out of the 300 or so investments Railpen made in the asset class, 11 tower blocks have been identified as being unsafe and in need of expensive remediation work. The Department for Levelling Up, Housing and Communities launched legal action against Railpen’s Grey GR after two years of delays to remediate Vista Tower, which has more than 100 flats.

The government – and in particular Communities Secretary Michael Gove – says it is committed to ensuring building owners, landlords and developers meet their legal obligations and protect leaseholders in their own homes.

But this view is now under challenge in the courts, with a first hearing held on 14 December.

Mr Chilman said that there would be consequences for the valuation of the assets within Railpen’s long-term income fund, within which its affected residential ground lease assets sit.

“The members of the pension fund are likely to see a significant writedown in their assets, to be honest. We’re not sure what the remediation costs are at the moment, so we will take a view at the end of this year about what potential provision we should put in for those remediation costs.

“So there could be a loss of several £100m potentially that will probably be spread across 40 different sections of our schemes.”

Railpen is now refocusing its residential investment strategy on opportunities such as Trocoll House in Barking, where it agreed a £92m funding deal to develop 198 build to rent apartments, with the local authority as head leaseholder.

Mr Chilman added: “This has shown us is we need to be very careful moving forward. We will still invest in residential real estate, but it changes the way we look at things.

”Chilman says that when Railpen invested in ground rents, acquiring Vista Tower and a number of other buildings over 18 metres, the cladding used “was acceptable”. “I don’t think cladding as an issue had been thoroughly identified at that point.”

However, the Grenfell investigation revealed that there were issues with the sort of combustible cladding being used across various tall residential towers.

The government set up its £5bn Building Safety Fund to provide cash to private landlords such as Railpen, to finance the replacement of dangerous cladding and enable remediation works to proceed.

But Railpen says it has been impossible to access the fund due to changes in legislation since it was launched.