You would need to have been living under a rock to have missed the arrival of Legal & General on the UK Housing scene. From a position of no involvement in housing, L & G are now set to become one of its biggest players. How has this come about? Because of the housing crisis.
L & G (and others) see the current UK housing market as an opportunity. With a backdrop of strong demand, rising prices and an existing set of housebuilders which are unwilling or unable to ramp up production to meet the demand, this looks like a market that is ripe for disruption.
Instead of going down the normal route for a new entrant to the market, and playing the same game as the uincumbents, L & G are going for broke. They have invested in the largest factory in the UK, bought a Cross-Laminated Timber production line, and just in case you missed the point, are setting up a plant to manufacture CLT to guarantee their source of supply. They are doing nothing by halves.
The plan is to produce and supply 5,000 homes per year, or more from the factory, and to supply all of it using CLT. Thereby adding the same output to the industry as ten additional Barratt divisions, or a Redrow to the housing industry.
They don’t intend to compete directly with the housebuilders, because they are not going to be selling a comparable product at a comparable price. Mostly they will be developing to own and rent their own housing stock.
The interesting elements of this is because much it will remain in their ownership, it is open to investment. The U.K. Housing industry has not been open to investment since we decided that we had to own our own properties. Now that we have accepted that this is both unwise at some stages of our lives, and impossible for many people, there is a clear and undeniable need for long term home rental. A pension fund looks at long term home rental and sees something that it can invest in.
The housebuilders have shareholders too, but their focus is on paying out dividends each year rather than owning assets thta appreciate. Although housebuilders do won assets in the form of land, and it does appreciate, it doesn’t have nearly as much value when traded as it does when it has homes built on it. This makes the housebuilders a poor investment risk compared to rental property. Rental property accrues value and brings in an income every year, so there are two opportunities to make a profit, both in the short term and in the long term.
In Germany, a large proportion of housing supply has pension fund backing. In the UK it is almost non-existent due to our historical distaste for renting. This is all going to change and there is a lot of headroom to grow into for investors.
Another impact from the pension fund is that they care about the long term, their business model means that they have to. If you are paying out pensions to thousands of people every year, you have to be confident that the money will be there for them. This means that they care about what homes are built from, how well it will last, and how sustainable they are, because it matters a great deal to them and to the people who are paying into their pension funds. Who would invest in an oil company now? Or a coal mine? But housing in the UK, with strong demand set to continue into the foreseeable future? That looks like a safe bet.