Last week, Legal & General increased its investment in government-let assets to more than £700m. This week, it put the 335,000 sq ft Aberdeen International Business Park (main picture) up for sale through DTRE for £115m. The moves are part of a strategy to bolster its £5bn L&G Retirement annuity fund by shifting its focus from private to public sector-leased assets.
Owning government-backed assets has become easier to justify for the fund manager as less cash now needs to be set aside to match its pension liabilities under the Solvency II regulations introduced last year.
Pete Gladwell, head of public sector partnerships at LGIM Real Assets, said: “When institutions such as Legal & General were created in the early 1800s we were the original crowdfunding platform, investing society’s capital for society’s benefit.”
Gladwell said that the fund’s recent £35m investment in Leeds City Council’s revamp of Headingley Stadium was an example of L&G rediscovering that ethos.
He added: “Because of the regulatory environment driven by Solvency II, these long-term government-backed leases are very valuable. They benefit from a lower regulatory capital requirement, so we can require a lower return on our investment.”
Government lettings
So far, L&G has invested in more than 800,000 sq ft of space let to the Government Property Unit and has an appetite to do more.
Alongside its £100m forward funding of New Waverley in Edinburgh, revealed by EG last week, it is funding a 300,000 sq ft HM Revenue & Customs headquarters at the Central Square regeneration scheme in Cardiff.
It has also bought the 350,000 sq ft India Buildings in Liverpool from Shelborn Asset Management and it is buying Salmon Harvester Properties’ 3 Glass Wharf in Bristol’s Temple Quarter Enterprise Zone, where HMRC last year prelet 110,000 sq ft.
The annuity fund is also in talks to forward fund the 240,000 sq ft that the GPU has prelet at Miller Developments’ Arena Central scheme in the centre of Birmingham.
The fund, established in 2011, has grown to be the biggest in L&G’s Real Assets division and has invested in deals as varied as a football academy in Burton-on-Trent and a loan to housing association Places for People.
Gladwell said that although the fund had a “strong and persistent” appetite for such deals – L&G’s overall annuity portfolio is valued at £55bn in total – assets were regularly reviewed in relation to the fundamental long term social demand for those assets, the covenant strength of tenants, and the relative value versus a more traditional real estate valuation. Selected sales from the portfolio can then be recycled back into longer-term investments.
And because it is seeking relatively modest returns, the fund can afford to pay a premium for deals that might be shunned by its peers.
Appetite for Aberdeen
Its Aberdeen sale will be a test of investor appetite for a large single-let property in the Scottish city, where the property market is largely tied to the fortunes of the oil and gas industry. Any investor would need to take a view on whether or not the scheme’s tenant, Norwegian oil giant Aker, is likely to renew its lease once the 17.5 years remaining expire
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