Legal and General is vying to become the leading private affordable housing provider in the UK as part of a plan to establish institutional investors as landlords.
The insurance, pensions and investment management company is looking to shake up the “underinvested” affordable housing sector by launching its own for-profit registered provider, called Legal & General Affordable Homes, which will use equity funding to deliver 3,000 homes per year.
L&G’s ambition is to create a sustainable funding model in which institutional investors are long-term holders of social housing assets “working alongside best-in-class affordable housing operators”.
While institutions have invested in the not-for-profit housing association sector through debt and long-dated bonds for a number of decades, it marks a new direction that would see a mainstream investor take direct ownership of housing assets.
The move also follows a flurry of equity investment in the affordable housing sector, with the launch of a number of social housing real estate investment trusts (REITs) and recent news of US private equity giant Blackstone taking a stake in a for profit RP that has been buying up affordable homes via section 106 deals.
L&G – which has £983bn of assets under management – plans to seed fund its new affordable housing company from its own balance sheet, with a view to bringing in third party equity capital from UK pension funds in the first instance, before potentially looking overseas.
Nigel Wilson, CEO of Legal & General, said: "Despite the fact that the UK is a great place to invest, 30 years of underinvestment have led to poor productivity, low real wage growth and numerous market failures.
“Affordable housing is a classic example of underinvestment with minimal new equity capital being deployed to the sector. This is not a sustainable position – either for the sector or for the 1.3m households currently on a waiting list.”
Mr Wilson said this ‘important sector’ has now been added to L&G’s plan to invest £15bn in infrastructure, which it announced five years ago.
L&G Affordable Homes will sit within L&G Capital, which invests into sectors "where there has been a shortage of investment and innovation, focusing on growth opportunities and scale ups”.
The RP will sit alongside other housing arms, including its housebuilder L&G Homes, its modular construction business, its build to rent JV, and Cala Homes, which it took a full stake in recently.
Simon Century, head of affordable housing at L&G Capital, told Social Housing that the new RP intends to offer index-linked returns through dividends, and could itself evolve into a REIT structure in due course.
Mr Century – who moved to L&G from his role as treasury director at Bedfordshire-based housing association BPHA – said the insurer has been looking at whether there is a ‘societal requirement’ for more equity in the affordable housing sector to help to address the supply shortage, alongside a ‘reasonable enough’ return on investment for its pension fund clients.
“Fundamentally it comes down to need; there’s a huge need to do an awful lot more to get through that [housing] waiting list,” he said.
“The nature of what we do is aligned with the [social housing] sector, we take a very long term view…the nature of the client base and capital is long-term, stable, inflation-linked to meet pension payments.”
Mr Century would not reveal how much equity the group is investing but said it would be ‘significant’, adding that L&G ‘does not enter a sector just to play around the edges’.
He also would not be drawn on yield, but said they are seeking returns that could be compared to those expected by a housing REIT, which have been targeting around 5 per cent and above.
’Equity play’ Mr Century described the model as a “pure equity play”, adding that while others are already looking at this in the market, ‘someone has to go first at pace’.
He also suggested the traditional housing association capital structure that relies solely on debt – and is therefore restricted by gearing and financial covenants – does not have enough capacity on its own to meet the housing challenge.
He said: “Debt has a huge place….but if you speak to any lender out there, there is a limit to how much they will lend.
“All we’re saying is how do you go beyond that; how do you create something more.”
By relinquishing ownership of assets, housing associations could deploy their capital in a different way, such as investing in other services, he said.
But he added that it needs the right partner and mechanism.
“The movement of assets into institutional hands has to make sense – it’s how you increase capacity”, he said.
The for profit RP will be seed funded from the L&G balance sheet, before sourcing equity investment from UK pension funds to start with, and potentially then across Europe and the US.
L&G Investment Management – which has been a long-standing debt provider to housing associations – will help fundraise in due course, said Mr Century, who also said it was “definitely possible” that the entity could evolve into a REIT structure. He added they are not trying to create a ’locked down’ inflation-linked structure.
Mr Century said the sector is not yet fully understood by equity investors but there is a “natural fit for what we’re trying to do”, and that an improved policy environment means it is also the “right time”.
L&G is now seeking approvals from the Regulator of Social Housing and is appointing management and board members. L&G Affordable Homes plans to deliver 3,000 homes per annum by year four of operation. It will focus initially in the South East but plans to work across the country. It would hold and manage assets in the longer term, agreeing management contracts with housing associations.
It will not develop itself but issue design and build contracts, and will work with L&G Homes, joint ventures or by forward funding schemes.
Half of what it does will be social or affordable rented, with the rest as shared ownership or intermediate rent.
The RP would also seek any mechanism that provides a form of subsidy, including section 106, grant or government guarantees.
In response to entering an overheated s106 market, Mr Century said that would be “one element of what we’re trying to do”.
“Ultimately subsidised housing needs a subsidy somewhere; that’s how you get the maths to stack up,” said Mr Century.