Direct Investment.

Direct Investment.

Banking austerity has created an opportunity for insurers to offer long term finance. As banks retrench, a wide range of attractive direct investment opportunities have arisen for us, providing both a return on investment and the opportunity to match liabilities and assets in our annuity book. We choose direct investments that can provide higher risk adjusted returns and provide a natural fit for us. Our focus is on infrastructure, commercial lending, property (commercial and residential) and asset finance. We have earmarked substantial capital for these sectors across the Group.

HOMEBUILDING: A POLICY FAILURE

The failure to build homes in the UK is evidence of a structural problem which has existed since the early 1970s. The long decline in homebuilding coincided with a massive rise in house prices. In the late 1960s, the UK was building over 400,000 homes a year, with local authorities and private investors both contributing in large measures. Now fewer than 100,000 homes a year are built, with the supply from local authorities having completely dried up. The banks have retreated from lending money for homebuilding, while the rise in prices has contributed to the £17 billion a year the Government pays in housing benefit, mostly to private landlords.

HELPING SOLVE THE HOUSING CRISIS

In March 2013, we announced a £102 million, 15-year debt facility for the Hyde Group, one of the largest housing associations in England. Hyde was formed in 1967, with the aim to make a lasting difference to people’s housing needs and has grown into one of the main providers of affordable housing in London and the South East. Hyde owns or manages around 48,000 properties with a wide range of tenures, making a significant contribution to meeting housing needs and improving people’s quality of life.

Last time buyers | Picture of the silhouette of a house roof (photo)

LAST TIME BUYERS

In the UK, 49% of owner-occupied homes are, according to the English Housing survey under occupied. A quarter of UK homes have just one person living in them; these are mostly over 60s. Yet the supply of homes for young people and families is inadequate.

In the UK, just 1% of elderly people live in specially adapted homes, compared to 17% in the US and 13% in Australia and New Zealand. There are 25 million empty bedrooms in England, yet the supply of housing stock for younger people is woefully inadequate. Most of the nearly two million households on local authority waiting lists also want one-bedroom or two-bedroom homes. However, the proportion of one-bedroom properties being built has fallen to its lowest level for 20 years. We need to build more homes for first time and last time buyers, encouraging the elderly to move to smaller homes.

INVESTING IN EDUCATION

We expect the next decade to be a more testing period for the UK’s higher education sector, with higher tuition fees shifting the financial burden onto students. However, the UK continues to enjoy a world-leading position in the market for internationally mobile students. As a result, we expect to see an emerging trend towards universities increasingly being defined as ‘premium’, research-oriented institutions able to attract students from overseas and a more value-oriented tier which are able to deliver lower-fee courses and a good record of securing employment for graduates.

We’ve now invested over £750 million into student accommodation. We’ve delivered eight major university based acquisitions, with four taking place in 2013.

In 2013, we acquired new student accommodation schemes, one backed by Aberystwyth University and another let to Newcastle University, for a total consideration of £130 million. We agreed to forward fund the development of an 193-bed student accommodation scheme pre-let to Canterbury Christ Church University for a total consideration of £15.7 million.

In May 2013, we financed the University of Hertfordshire’s 3,000-bedroom student accommodation scheme through an index linked unwrapped private bond placement, having also previously secured a £121 million, 10-year debt facility to UNITE.

Previous deals have included forward fundings with Imperial College, University of the Arts London, Southampton University and Greenwich University. Forward funding enables loan agreements to be made that start at a future date.

CALA homes | Paul Stanworth, Managing Director LGC, and colleagues (photo)

CALA HOMES

“CALA has been a strategic and successful direct investment, providing equity finance to supply new housing in the UK, when it is at a severe shortage.”

PAUL STANWORTH, MD, LGC

In March 2013, we acquired a 46.5% shareholding in UK house builder, CALA Group, giving CALA the capital backing and potential to build many new homes throughout the UK. We acquired CALA from Lloyds Banking Group in a joint venture with Patron Capital Partners. The purchase enables us not only to develop assets with attractive returns for shareholders but satisfies our desire to increase the UK housing stock.

CALA is just one of many initiatives where we have planned to provide new housing across all sectors of the market. We plan to use our own land banks to increase the supply of housing. We can also maximise value to the group through the future supply of mortgage and protection products.

The purchase shows how different parts of our business work together on major projects. Bill Hughes’ team in Legal & General Property originated the deal. Wadham Downing, our mergers and acquisitions and strategy director and Paul Stanworth took the deal forward with help from Group Legal.

DELIVERING BETTER HOMES FOR THE ELDERLY

The crisis in funding adequate care for the elderly in the UK is also a failure of governments to plan society’s accommodation needs. While the over 60s in the UK are sitting upon over £1 trillion of housing wealth, young people are unable to afford to get on the housing ladder. We believe that there must be a care solution that provides intergenerational fairness and helps ‘last time buyers’.

We not only want to see an equity release market in the UK that operates at critical mass and provides more flexibility in income withdrawal, but we want to see better quality housing for the elderly, either retirement villages or care homes according to people’s individual needs.

Our recent purchase of 13 care homes let to Methodist Homes (MHA) for just over £70m demonstrates our commitment to improve the quality of care for retired people.

IMPROVING UK INFRASTRUCTURE

In 2014, we continued our infrastructure investments, announcing a £60 million new business development in Salford, in partnership with the English Cities Fund (ECf). Through ECf we are also working with housing associations to produce affordable rental property.

MANAGING RISK

In building our commercial lending portfolio, we are inherently exposed to the risk of loan default. Over the years through Legal & General Property we have built significant expertise in property markets, while LGC has established credit models that support the assessment of loan security and the pricing of the risk.

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