Meet The Men With £1 Trillion Of Firepower Changing The Way Property And Capitalism Work

Legal & General Chief Executive Nigel Wilson is trying to reconfigure the way capitalism works, kick-start the once-booming economies of Britain’s regional cities, make the UK a world-leading economy like it was in the mid 19th century and create enough assets to pay millions of pensions for decades into the future. It is quite the to-do list. And the built environment is one of his key weapons.

L&G is the UK’s largest investment manager, among the 15 largest in the world, with more than £1 trillion of assets, the majority of which comes from its pension and life insurance business. Since taking over as chief executive in 2012, Wilson has transformed the company, with head of real assets Bill Hughes one of his chief lieutenants.

Ahead of Wilson’s appearance at Bisnow’s London State of the Market event on 14 November, Wilson and Hughes explained their ideas around “inclusive capitalism”, how big investors need to think more creatively when it comes to investing in property and infrastructure, and how when it comes to transforming a business, emotion is as important as strategy.

The list of innovative, complex investments L&G has made in the past few years in property and beyond is long and fascinating. While many institutions are narrowing their focus to core assets in the world’s biggest cities, L&G has gone way outside the box, usually in partnership with universities or local governments, using its own balance sheet money and that of its client funds.

It is building a £350M office and residential scheme aimed at science firms in Newcastle, and a similar £400M media and tech hub in Cardiff. It struck a joint venture with Bruntwood to invest up to £1.8B in the nascent sector of science property across the UK. It provided £285M of funding secured against a complex portfolio of 473 properties in Glasgow to help the council there settle an equal pay liability with municipal workers.

It is investing £750M in affordable housing, including setting up its own regulated housing provider, is one of the first UK institutions to enter the senior living sector and put its money where its mouth is when it comes to modern methods of construction by building its own modular housing factory.

Outside of property, it has set up its own rival (what it calls an ethical alternative) to payday lenders like the now departed Wonga, is backing an electric vehicle charge point company and has made hundreds of small-time bets in emerging sectors like gene therapy and nuclear fusion technology. And with pretty much every investment it makes, it is looking to do good for society as well as its own balance sheet.

“We have the ability to use our huge pool of assets to create what we term inclusive capitalism,” Wilson said. “We take informed risks and we want to be rewarded for that. You invest in old assets like everyone else, or you can help to create new sectors, new places and real jobs.”

From the point of view of both a pension fund manager and a property investor, Wilson said the strategy of backing emerging sectors and investing in the infrastructure needed to help them flourish is not just altruistic, but makes sound commercial sense.

“On the pensions level, we have huge amounts of liabilities. There are not enough assets out there to service those liabilities, and the ones there are don’t provide the returns that people expected. Rather than just outbidding people for existing assets, it makes sense for us to create new assets. And some of these new sectors that are emerging will create the need for new physical assets and infrastructure. Where we see market failings we are investing, and we can be patient.”

A perfect example, Wilson said, is the life sciences industry, and the changes in that industry being created by the shift from molecular biology to gene therapy techniques. The potential growth of this sector in the UK led it to invest an initial £360M in a “scitech” joint venture with Bruntwood, one of the few property companies creating property specifically tailored to life sciences companies. The joiunt ventureas 1.3M of assets today, that it wants to grow to 6.2M SF over the next decade.

Its £4B property joint venture with Oxford University is also looking to tap into this trend, as well as build affordable homes for university staff, students and local residents in a city where the lack of affordable housing matches that of London.  The initial wave will deliver 1,000 subsidised home for university and college staff, 1,000 units of graduate accommodation and 1,000 market homes.

But as well as investing in leafy, affluent cities like Oxford, L&G is making similar investments in cities like Newcastle and Cardiff. In Newcastle, Wilson’s home city (a signed Newcastle United shirt from the Alan Shearer era hangs on the wall of his office) L&G is investing £350M in the Helix scheme, a joint venture with the city’s university and local council that will see 500K SF of offices and research space built alongside 450 new homes on the site of the former Newcastle Brown Ale brewery. One of the first buildings in the scheme, the Catalyst, is the home of the UK’s National Innovation Centre for Ageing and the National Innovation Centre for Data.

“One of the problems we have had in this country is the growth of cities outside London,” Wilson said. “You had a structural change with the Big Bang [the 1980s deregulation of London’s financial markets]. Plenty of infrastructure got built in London, towns outside London grew to depend on it and London started to only think of itself. We’re now building that infrastructure in Glasgow, Leeds, Cardiff, Newcastle, Manchester and Belfast.”

It is no coincidence that so many of L&G’s projects are joint ventures with universities and local authorities. Wilson is a big believer that the UK has for the past century failed to maximise the potential of its higher education system.

“We have six of the top 30 universities in the world here, and many more in the top 100,” he said. “But they have not been great at scaling and commercialising their research, like universities in the U.S. have.

“In the UK, we have invented a lot of things, but we haven’t taken advantage of it, the U.S. or China has — just think of Tim Berners Lee and the internet. We think these schemes can be a catalyst where the universities work alongside business and improve productivity, which creates jobs and is great for these cities.”

Hughes said this holistic view has changed the way L&G views real estate investments, and was central to formulating the company’s “future cities” strategy, where is looks to invest in companies, properties and assets across different sectors in chosen cities, to try to improve returns.

“We try and think about the built environment in its totality, rather than just thinking about commercial real estate, or just retail,” he said. “We make a point of thinking about smart cities, the real estate and the infrastructure, because all of these things are connected.”

Wilson said institutions like L&G are making an impact in the world of residential, but failings baked into the UK system over the past 35 years make it slow going.

“The capital that is tied up in residential assets is lazy capital,” he said. “The housing acts of the 1980s meant we stopped building council houses, the housing benefit bill has rocketed, and we didn’t replace the council houses that were no longer being built. That’s a societal failure, and Britain is unique in its obsession with homeownership. Long-term institutional money is coming in to that sector to replace that housing, and coming up with some innovative solutions — we’re turning a [big-box retail] B&Q unit into a later living scheme.”

Both Wilson, when it comes to L&G as a whole, and Hughes in the property division, have undertaken a radical change at L&G, which was once considered a fairy typical, sleepy, conservative investor. To institute that kind of change in a company with almost 10,000 employees, Wilson points to a perhaps overlooked factor: emotion.

“We have a very collaborative culture, both internally, and when it comes to partnerships with local authorities,” he said. “But seeing the changes that our investments bring about, there is something emotional about that as well. We have some clever, hard-nosed financial guys that get pretty emotional when they see some of the things that are happening. They can see and feel the changes we are making in places, and it means a lot to them.”

As a man responsible for the long-term pension and life insurance policies of millions of customers, Wilson keeps a keen eye on the way technology will impact job creation and the financial security of people in developed economies. He is a techno optimist, and does not subscribe to the theory that machines will cause swathes of job losses, and the example he gives has a key lesson for real estate.

He compared three aerial images of a piece of land in Salford — in the 1850s, it shows a bustling area at the heart of the industrial revolution. In the 1980s, there is an urban wasteland after industry retreated. Today, there is MediaCity, the HQ of BBC Television and a vibrant creative hub.

“There is a massive skills shortage in this country, but the opportunities are there if we can give people the right skills,” he said. “People predicted that jobs would be destroyed in the 19th century, and in the 20th century, but new technologies create jobs. If you look at areas like electric vehicles, these will be massive creators of jobs, and if people have the right skills, these jobs aren’t going away. You can be fatalistic, but the people who are won’t change the world.”

All of these new sectors, he argued, will need the right physical environment to flourish.

One of L&G’s most innovative projects epitomises how it is willing/having to show patience in order to break new ground and bring about some of the changes it wants to see in the world. In 2016 the company announced plans for a modular housing factory in Yorkshire, to try to make the process of delivering its own residential units quicker, cheaper and more efficient, with the ultimate plan to produce units for other developers as well.

The opening to the factory was delayed, and accounts for the facility showed it making a loss in 2018. But Wilson said this project highlights its long-term, patient attitude.

“If you look at something like nuclear fusion, the science exists, but you still need the engineering, which is difficult,” he said. “People have known how to make electric cars since the 1960s, but the technology needed to improve to make it cheap enough to be financially viable, and the same is now happening with solar power. But 2020 will be the year this really gets off the ground. I would have liked it to be 2018, but in the context of our 180-year history, a few years out is OK. And I haven’t met anyone who doesn’t think that modular won’t play a big part in housing delivery.”

Wilson said he is at a loss as to why other big institutions aren’t piling more into real assets and infrastructure, citing Brookfield as one of the few examples in L&G’s peer group that is investing in an interesting way.

As Wilson sees it, Britain has a chance to radically overhaul its economy and society, and L&G can play a big part in that. 

“For us, you look at the structure of society and it seems obvious,” he said. “There is the demographic trend, the climate change trend and the technological trend, and this is where you should be investing.

“I think things look a lot like they did in the 1850s and 1860s, where you had these huge inventions, the railways, the Manchester ship canal, the London sewerage system. These things changed the way we lived and dragged millions of people out of poverty. Britain has a second chance. We were brilliant at inventing things, then we went off the boil for a bit and didn’t capitalise, but we’ve got a chance to do the same thing again today. I just hope we take it."