Cast your preconceptions aside: bigger is not always better, institutions are not monoliths, and their investors are definitely not dull. Bill Hughes, head of Legal & GeneralProperty, talks to Damian Wild about subverting expectations. Portraits by Tom Campbell
Less public than the REITs, less dynamic than the big boys of private equity and less capable of market-moving swoops than sovereign wealth, institutional investors have long been saddled with a reputation for being withdrawn, staid and conservative.
Is the reputation deserved? “Well,” says Bill Hughes, “I think institutions are perceived to be dull and boring and risk-averse and, frankly, I think there’s a lot of truth in that for a lot of us.”
Unlike many in this industry, the head of Legal & General Property – and from July the vice-president of the British Property Federation – is not content to lead an unexamined life. He is overhauling the focus of his own organisation, wants to reverse the perception of institutions at large and won’t rest until he’s rewritten the property lexicon. And this most active of fund managers – it seems there are few committees that have not been graced by Hughes’ presence at some point – may just have the energy, the contacts book and the appetite to pull it off.
Vital change
This is no pre-presidential posturing. Hughes has been with L&G for half a decade and could see in his earliest days that change was vital.
“When I joined the business I could see that we were large and flabby and there were individuals who thought that because we were big, we were good, and that’s clearly not true,” he says. “Scale is not necessarily a virtue. Big is not necessarily better. That label of ‘institutional’ seems to my mind to be mainly about being inert, large, flabby and possibly accidentally influential because of scale. I think we can be much better than that.”
Already he’s redrawing definitions. “I think that some institutions – and I’d like to think we’re one of them – can set the record straight when it comes to doing things that are a bit more imaginative and creative. We tend to manage what I would call patient capital.
“There are some cities in the UK – Liverpool, Plymouth and in London – where we’ve taken a very long-term position and have ended up regenerating a location. You can do that if you’re managing patient capital.
“The other thing thatmakes institutional money management a bit different from, say, REITs and private equity, is that we haven’t got huge amounts of scrutiny upon our immediate strategy and, where we do, it’s fund by fund and we manage lots of different pools of capital. That allows us to do things a bit differently and to be imaginative.”
You can see his point. Imagine the analyst call that would follow, say, British Land announcing it was taking a half share in housebuilder Cala, making a £102m loan to housing association Hyde Group and injecting £100m of forward-funding to help the Football Association deliver the National Football Centre.
“We can do those sorts of transactions because I’m not immediately accountable to shareholders who are going to stand up and challenge me or having to justify my team as being very sector-specific focused,” says Hughes.
Role reversal
But Hughes can see the downside and is quick to warn against seeing L&G simply asa generalist or an opportunist.
“In my career I’ve seen something of a turnaround between highly creative REITs that were dazzling in some ways and very brave institutions. To some extent there’s been a role reversal. I think some of the REITs have got into a habit of being asset collectors. Very often, if you see a REIT buy an asset that’s been built, developed and created by somebody else and some will ask the question: ‘What value are they really adding?’ Especially if it’s a clean, fully let scheme.
“That’s why I see ‘institutional’ almost as a derogatory term. In that sector I think there’s more creativity and willingness to do deep change, such as regeneration, than perhaps people would imagine.”
If institutions have a job to do in changing how they are perceived within the property industry, that’s doubly true in the wider world of fund management. No one knows this more than Hughes: before joining Legal & General Investment Management in 2007, he had been UK Head of Real Estate at RREEF and deputy managing director at Schroder Property Investment Management. He bears the scars of being looked down upon by the stars of money management. “Generally speaking, the perception is that the property team are the also-rans. They’re not very intellectual, they haven’t gota high IQ. If you have an intricate conversation about something complex, then they’re not really going to be there.
“One of the things that has to happen in my world is making sure that real estate is seen on an even footing with the other asset classes. I happen to be working for an organisation where the leadership really does believe that real estate in its widest sense has a role to play in terms of risk and return and diversification and in changing the fabric of the UK.”
The future for L&G
Over the past few months the evidence of Hughes’ work to change the fabric of L&G,if not quite the UK yet, has begun to emerge. Building ona recent track record of bold investments and lending, Hughes plans to go further. He expects his property team’s £10bn under management to double within five years. In doing so, investment allocated to alternatives will soar from 5% to as high as 25%. He will step up big-ticket lending, look seriously at infrastructure investment and embrace the private rented sector model as an investor and developer of build to rent properties. A personal commitment to sustainability will be at the heart of the revolution.
Success will be determined by a change in the relationship between landlord and tenant. “The language is a bit antiquated – landlord/tenant implies master/slave. To my mind, the future of the relationship is going to be more collaborative.
“Historically, real estate owners/landlords have been deficient in my view – they’ve never really understood the occupational requirements.It’s flagrant, lazy, complacent thinking that’s got to change.”
And those are the values he has instilled in his team. “I think above all else I’ve tried to inject in everyone who works for me an ambition that we should expect to be top quartile. It’s no good being average and I’m not interested in hiring average people or tolerating average behaviour. We need to be first-rate.”
PRS investment is ‘not the most important thing necessarily’
PRUPIM’s purchase of a £105m portfolio from Tony Pidgley’s Berkeley Group last month marked the first UK institutional PRS investmentin a generation. It helped convince doubters that PRS was a model fit for today and begged the question: how would investors, not least L&G, respond?
“I think PRS is very interesting,” says Hughes.”I’m not interested in buying to rent, but I am interested in build to rent, which means you’ve got to be in quite high up the supply chain – up river – to be in build and design procurement. That’s how we will do it.”
But he cautions that PRS is not the be all and end all.
“Probably the most challenging thing about the amount of hours I have in a day is distinguishing between opportunities that are runners and things that are distractions. There are lots of things on the go in the housing sector, more generally of which PRS is, to my mind, just one. It’s not the most important thing necessarily. We’ll probably branch out to social housing to an extent and house-building and lots of student accommodation.
“Last year, looking at service departments, we’re looking at various models about how we procure PRS but that’s not the only thing we’re doing.”
