Exclusive interview with Bill Hughes of L&G

Legal & General’s (L&G) emergence in the housing mainstream has an illuminating trajectory. Until 2012, the pension fund manager was an entirely commercial investor, dealing in offices and retail. It played market cycles, and the closest it got to homes was selling industrial sites to house builders.

Five years ago, something changed. As the UK emerged from the downturn, L&G made its first investments into properties “with beds”. The theory went that the fundamentals underlying UK housing - if viewed as social infrastructure - could shelter pension funds against the prevailing winds of boom and bust, with long-dated, secure income underpinning a supply-constrained market.

L&G began the process cautiously, through loans to housing associations (alongside a £2bn investment in student accommodation). It bought house builder CALA Homes in March 2013, giving it direct exposure to residential.

Moving up the so-called risk curve, L&G announced a £1bn build-to-rent fund last year. Soon after, it emerged that it was planning on building homes through a massive offsite factory in Leeds - the largest in Europe. Suddenly, it would have control over the whole residential development process - from designing and constructing units to overseeing long-term management of homes.

In just five years, L&G’s residential exposure has grown from zero to £5bn. Inside Housing therefore thought it was time to sit down with Bill Hughes, head of real assets at L&G, to talk about what happens next.

Mr Hughes describes his company’s recent involvement in housing as a learning curve. “We have gone from lowest risk to actively taking more risk and now we’re actually involved in the development process,” he says.

Taken together, the build-to-rent fund and the factory both represent fields that have long felt ripe for the mainstream. People are now referring to private rented sector housing and modern methods of construction in a way that suggests delivery rather than talk.

Ready for risk

Mr Hughes has wasted no time in getting the build-to-rent pipeline - in partnership with Dutch pension fund PGGM - up and running. His 150-strong team has deployed £350m on four schemes in Bath, Bristol, Salford and Walthamstow, and is now negotiating on transactions worth £700m, bringing the overall total to 3,600 homes. Once the £1bn is 85% deployed, it is understood L&G will go out to the investor market and seek fresh capital.

Despite his macro role, Mr Hughes says he still likes to “get his boots muddy”. Most recently that meant a trip to Leeds, where L&G is close to buying a site that was yesterday (Thursday 6 April) expected to get planning consent for 250 units.

“I thought hard: what does this site look like in the future? It’s a part of Leeds along the canal which I think looks incredibly desirable as a rental location, and will be successful. It’s yet to be properly established. Leeds as a city is undersupplied,” he says.

That deep dive approach is surprising for a man with £24bn in total assets under management, but Mr Hughes’ ‘real assets’ division appears to be nimble. In Bristol, the build-to-rent fund has bought a site neighbouring its 255-home development in order to deliver a further 100 units.

It may do the same with an empty adjacent site in Leeds.

There are clearly economies of scale to be had here, and one thing that has held back the institutional market in the private rented sector is the inability to invest at scale in existing stock. Mr Hughes says that L&G found it could not buy the stock as standing investments, so it decided to build them instead.

Is it difficult competing with the house builders on sites? “If you look at long-term pension and annuity capital, looking principally for long-term stable cash flow, that sort of capital competes against the model of ‘borrow, build and leave’. We see more long-term value, which makes us competitive.”

And despite the cautious start five years ago, he appears confident that - even though the first units are yet to come out of the ground - L&G’s build-to-rent will scale up rapidly.

And what of the factory? Since the news emerged last February, there has been deafening silence from L&G. Like the rest of the business, Mr Hughes is on PR lockdown and only able to talk in general terms. L&G Capital, which is separate, is overseeing the factory. Mr Hughes says it will have capacity for 3,500 units a year; the company’s preferred material for homes is cross-laminated timber; and it may also deliver commercial property, such as hotels, or hospitals.

Ample opportunities

Still, we don’t know when the first unit will roll off the production line. Mr Hughes says the business case remains indisputable. “Our approach towards offsite construction and modern methods is: how can the UK produce high-quality residential in a sustainable fashion at scale?

“It isn’t innovation as such because it’s already happening outside the UK. It’s extraordinary the UK has failed to produce that factory production at scale. The built environment is littered with opportunities here.”

He says L&G’s build-to-rent fund could end up as a client of the factory, but there will be a diversity of clients from the public and private sectors.

As for housing associations, it seems the flurry of lending that characterised L&G’s activities five years ago is tapering off. “Their role is changing quite a bit. The regulatory regime is changing,” Mr Hughes says.

“It’s a troubled sector because more of them are having to get involved in market sale to pay for what they’re doing. It creates uncertainty about the future of those entities. So we’ll continue to be selective.”

That said, when it comes to L&G and housing, it’s safest not to rule anything out.

UPDATE 07/04/2017

This article was amended to reflect the fact that the new L&G factory will not be branded “L&G Homes”; it is likely to be branded “L&G Modular”