Legal & General advances plan to ‘crowd in’ third-party investment with housing fund launch

Simon Century, managing director of housing at L&G Asset Management, told Social Housing that the launch marks a “key milestone” for L&G and essentially represents “part two” of its funding journey in the sector.

 

“For us, ACCESS are first… but the very strong expectation in the near term is that others will be closely following behind. And we’ll keep scaling at pace from today,” he said.

 

While he would not be drawn on a specific target or timescale for future fundraising, Mr Century referred to the size of the investment L&G has made in the sector to date through its own balance sheet, which exceeds £1bn.

 

Pointing to this, he said: “Over a sensible period of time, we’re looking at both of these strategies being equally important to our growth through time.”

 

The fund will be managed by Legal & General’s asset management arm. In a strategic update in June, the group announced that it would bring together its asset management and origination businesses in a move to “scale its private markets capabilities”.

 

This sees LGIM and Legal & General Capital (LGC) become one combined asset management division.

 

Capital gap

 

The formal launch of L&G’s third-party capital strategy for housing follows analysis set out in the firm’s extensive ‘white paper’ in collaboration with the British Property Federation (BPF) in 2022. The research identified at the time a £34bn per annum funding shortfall to meet affordable housing demand, and proposed that this should be plugged by a mix of equity investment, private debt and government grant.

 

The firm has subsequently updated the figures to take in the impact of higher costs in the construction market and the financial pressures on housing associations, which continues to be an evolving picture. It has previously argued that scaled-up institutional capital can help to curb the drop-off in development from housing associations.

 

Scale up

 

The decision to launch its fund at the current time came down to the scale of the requirement for new capital, as well as the time being right for the next step in L&G’s approach to funding its activities in the sector, Mr Century said.

 

“For me this is in many ways the start of ‘part two’ of the funding story for affordable homes here for us.”

 

He added: “So far, it’s all been own-balance-sheet money. And obviously, we have a significant balance sheet that we have been investing – calmly, sensibly, but at quite a large scale over those previous five or six years since we launched in 2018.

 

“We will carry on doing that, and we’re very excited to carry on doing that. But for us the scale of requirement of new capital is just so big – we really want to bring in our partners as part of that.”

 

Over the past year, work has therefore focused on establishing “what that looks like” and “who are those partners” that L&G brings in, Mr Century said. “And in many ways [it’s] because they share our values and long-term ways of thinking about the sector.”

 

Investment horizon

 

The open-ended fund is designed to enable multiple investors to come in and is “effectively perpetual”, Mr Century said. “[That] basically means we can carry on fundraising from here. And that’s exactly what we’re aiming to do.”

 

In its fund launch announcement on Monday (15 July), L&G said that the vehicle would aim to deliver “a diversified inflation-linked cash flow” for investors and would operate a “direct leasing model”.

 

Mr Century said this reflects a “straight operational lease” on the properties, working with its existing housing provider/management partners and following the same model as on the homes owned in its other for-profits. Day-to-day management and repairs will be outsourced to these partners.

 

“The returns are the same as they have always been,” Mr Century said. “This isn’t a super-aggressive returning sort of fund, this is a long-term, stable, yielding asset, which expects to have an inflation correlation through time.

 

“All of us are aware of government risk attached to rent regimes, the risk of build costs, wider cost inflation happening. That’s part of the risk profile there.”

Pipeline of homes

 

L&G has said that the new vehicle will invest in “well-designed, purpose-built affordable rent and shared ownership housing in areas of acute need and demand across England”.

 

The fund has been seeded with a portfolio of 750 existing new build homes, assembled over the past year from existing LGAH vehicles, and these will soon be formally transferred to ownership by the firm’s ‘capital-focused’ registered provider. These are a mix of predominantly affordable rent, and some social rented homes and shared ownership homes.

 

L&G intends for the majority of homes delivered through the fund to be rented tenures, with a weighting towards affordable. “Like everyone else, we’d love to be doing more social rent generally, but grant rates aren’t quite there yet to make that happen at the scale that we want it to,” Mr Century said.

 

The strategy has a “strong pipeline” of new homes via LGAH, the company said in its launch announcement, and these are new build, energy-efficient affordable housing stock for which more than 95 per cent has an EPC rating B or higher.”

 

Mr Century said that these would be assigned to the new for-profit via a “standard allocation process” to decide where they sit best within L&G’s portfolio. He added that the fund “can do development and will do development itself directly”.

 

LGAH has a national team of development staff working across both Section 106 and, increasingly, land-led development where it makes use of grant funding via Homes England and the Greater London Authority.

 

Asked about the current challenges reported within the Section 106 market, Mr Century said that for L&G there are opportunities at the current time.

 

“For us we’re still big picture seeing lots of investment opportunities coming to us, because housing associations are not looking to go and buy the Section 106s because they just have so many other things to be doing on their own existing book. Or, where they are developing [homes], their focus tends to be now more on direct delivery as well by the grant programmes. So there’s certainly a gap there.

 

“For us as an investor, that’s in some ways an opportunity for us to go and try and help fill that gap on behalf of our investors and of the sector.”

 

Mr Century said it remains to be seen how the Section 106 sector would play out over the next few years as more investors come in, but he added: “I’m struggling to see a world in which the HAs come back into that at any great scale.

 

“For me it’s more a question of how many more investors can we start to club into this space, as well as wider direct delivery, to really pick up some of that slack, which I think clearly, as of today on the ground, is really needed.”

 

Future partners

 

Investors into the L&G Affordable Housing Fund are likely to include further LGPS funds.

 

“They have quite a large UK-centric focus, they can certainly have an impact focus, and increasingly they are working with government broadly to make sure a specific portion of the capital goes towards these sorts of investments. So they’re a great pool and I suspect in the sector more broadly we’ll see them come in a significant amount more over the next couple of years.”

 

But L&G will also look “beyond LGPS” for third-party funders, and this could include private pensions providers or even “retail-type angles” in due course, Mr Century said.

 

“What’s important for us is to make sure that they are coming in with a similar mindset. So they treat these as the long-term assets [and] customers that they are through time.”

 

Although not officially an ‘ESG’ or impact fund, the fund has set out its ambition to “positively impact hundreds of people’s lives, and will focus on “equity and affordability” as its core social priority.

 

Commenting on the fund launch on Monday, António Simões, who became the new group chief executive of L&G in January, said: “Today’s launch is an important step forward in putting pensions capital to work by investing in tangible assets that can help benefit the real economy and enhance local communities.

 

“With acute demand for affordable housing across the UK, the public and private sector need to work together to drive change. This fund builds on L&G’s ambition to scale our private markets platform and catalyse our own balance sheet investments by offering our clients new investment opportunities that aim to deliver compelling financial returns whilst tackling real-world challenges.”