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The UK's Biggest Institutions Are Radically Rethinking How They Invest In Big Cities

Quarry House, Leeds, now acquired by Legal & General

Another day, another massive Legal & General deal as it methodically hoovers up the UK Government's regional office requirements. This time it spent £243M buying Quarry House in Leeds, in the process acquring 374K SF of office space let to the government on a gold-plated 25-year lease. Long-dated, secure income streams get no longer dated, nor more secure. It is a victory for patient capital.

But behind L&G's appetite for government regional offices (£1.5B and counting) lies another story, which in Manchester, Birmingham and cities across the UK the real estate sector needs to absorb.

For the first time in decades, UK instititional investors are rethinking their UK regional investment strategy. What they want and how they are finding investments is changing rapidly. This is what UK cities need to know.

The Quarry House deal closed the same day that Legal & General hosted its inaugural Future Cities Commission. The meeting in Leeds saw L&G welcome mayors, local authority leaders, chief executives and industry leaders from across the UK. Those gathered debated how culture, sustainability, infrastructure, science and technology, and an aging population are all vital concerns when thinking about building the cities of the future. All of which is fine, and all of which we've heard a thousand times before.

The more interesting element is what L&G, and other big name institutional investors, think they have to do next.

Legal & General's answer appears to be that it will think less about how its portfolio is distributed among asset classes, and a lot more about creating concentrations of mutually reinforcing investments in certain locations.

“As a business, we decided we could no longer be just about real estate; we had to be about wholesale economic and social solutions for towns and cities," LGIM Head of Assets Bill Hughes said.

"Our transactions in Leeds exemplify this commitment, with £1.1B invested into major regeneration projects such as the redevelopment of Headingley Cricket Stadium; a city centre build-to-rent scheme; and the mixed-use Thorpe Park Leeds scheme, as well as key infrastructure and government hubs.”

“Aiding regional regeneration and supporting employment and productivity growth remains a key driver for us," LGIM Head of Strategic Investment Tom Roberts added.

But the question is, which locations to invest in?

City Square, Leeds

At this point in the conversation, Legal & General is joined by Aviva Investors, which has been asking itself similar questions about where to invest, and at what scale to make a solid, measurable, long-term income earning success of it.

Aviva Investors Global Property Analyst Jonathan Bayfield said that it would be investing in London, Manchester, Birmingham and Cambridge, and disinvesting in cities like Glasgow and Nottingham.

“The big change in the UK economy is a change in the role of cities," Bayfield said in an interview with Mix Interiors. "We’re going to see them as hubs of inter-connected networks and we are trying to focus on the locations that are best equipped to thrive in this changed world. So really like central London, central Manchester, Birmingham and Cambridge.

“Our job is to manage risk and we want to be in the locations that are most resilient to the upcoming change in the economy, and those four cities are the best because they have significant pools of talent, significant business clusters and significant knowledge networks. And they have scale.”

Large cities with liquid property markets, many economic legs to stand on, plenty of graduates and scalable potential are what they want. A scattering of investments all over the map is what they don't want.

The paperwork behind the Leeds Future Cities event suggests Legal & General is having similar thoughts, but maybe with a wider geographic focus.

"How do you define a good city? This is in the eye of the beholder but as
investors we look for areas where demand for services is sustainable and likely to grow," a paper by business space research manager Bob Page said.

A good city will have a growing population, a high proportion of graduates, and universities to produce them. There should also be good amenities, and L&G thinks it may have found a way to measure the cluster of parks, spaces, restaurants and culture that help make up amenity.

"An ... intriguing method is to associate the unexplained gap between an area’s
average house price and average wage with amenity; an area must have something about it which is appealing if it is unaffordable, after all," Page said.

If this is right, unaffordable housing can be added to the list of things that makes a "good city."

Like Aviva, L&G think weighting the portfolio by location, rather than by asset class, makes a lot of sense. "The jury is out on sector diversity, though — while a skew to a particular sector will pay dividends when the wind is in that sector’s sails, during a softer patch diverse economies tend to do much better and the two attributes tend to average out over the long term," Page said.

Cities like Manchester, Birmingham (and Leeds) that can claim to be a "good city" in the eyes of investors like L&G and Aviva have a bright future ahead of them.