Legal & General to expand commercial real estate lending business

Legal & General’s property lending business is planning to expand into advising third-party capital, Real Estate Capital can reveal.

The three-year-old team, headed by Ashley Goldblatt, currently originates senior loans on behalf of Legal & General’s giant in-house annuity business.

It has invested £1.2bn in 15 deals, mainly fixed-rate, 7-10 year commercial mortgages and longer dated loans to housing associations.

L&G will continue to originate mortgages for the annuity fund but will begin to look for third party money for a complementary lending strategy in the second half of this year.

Goldblatt, head of LGIM Commercial Lending Limited (CLL), said the starting point is “to map out a potential client base that can build upon the synergies the business can offer under its new Real Assets division”, which is headed by Bill Hughes, and combines property, infrastructure and lending.

“We are thinking about existing client relationships but we’ve also got to plough new furrows”, he said.

Within its whole business, L&G counts about half of the 6000 or so UK defined benefit pension plans as clients. “We should be in a fabulous position to work out a model that is likely to appeal,” he said.

“We can also find people who have different risk appetites. If we can find a way of welding clients together, so that one transaction can be divided between two parties who each get something customised for them, then I think that gets us to a sort of lending heaven.”

Goldblatt said there may be opportunities to exploit from the Solvency II directive, which is due to come into effect on 1 January 2016, principally advising insurance group clients which are not subject to the stringent matching issues of UK annuity providers.

“Although all EU insurers will be subject to Solvency II, the matching adjustment issue doesn’t apply to general insurance businesses and with-profits funds. They have other sensitivities, for example if they are a short tail business, which is prevalent in general insurance, then liquidity is important.”

He said L&G has been very cautious about its mortgage investments for its annuity fund because of prepayment risk and the matching adjustment issue.

The directive may make it even harder for insurance institutions that need to match longer-term liabilities to lend on commercial property by increasing the capital they have to hold in reserve on deals that don’t have the matching adjustment needed.

“Certain loans that made have made the grade pre-Solvency II might not make the grade after it because of capital considerations,” he said.

“That’s tough but that’s the world today. The banks have had to reshape their business in their new world [since the global financial crisis] and we’ll have to do the same.”

CLL’s book to date includes seven loans to the social housing sector, two hotel debt deals and two facilities to the care home market.

It has also made two loans to the student accommodation sector, one of which, its largest to date, was a £149m, nine-year loan at 4.3% to student accommodation specialist UNITE in January last year. Its most recent deal was a £50m, 25-year facility to Sanctuary Group secured against a portfolio of care homes.