HOUSING LIN Aligning Long Term Investment with Long

HOUSING LIN: Aligning Long Term Investment with Long Term Care LEGAL & GENERAL. FEBRUARY 2015 MAY 2013 EVERY DAY MATTERS LEGAL AND GENERAL PROPERTY PETE GLADWELL Head of Public Sector Partnerships 10 October 2013 1

FEBRUARY 2015 LEGAL AND GENERAL PROPERTY Agenda - Introducing Long Term Investment - Does it still have a role to play in addressing Long Term Social Needs? • Where are we going wrong? • The Aim of the Game • Distractions • New Models - Timing - Conclusion - Q&A 2

3 LONG TERM INVESTMENT 15 billion pound investment programme £ 429 m rebuild of the Royal Liverpool University Hospital. Hyde Housing Group £ 102 m, 15 year facility THE ENGLISH CITIES FUND £ 40 m, 25 year facility enabling 500 affordable homes Schemes in Liverpool, Plymouth, Canning Town, Salford and Wakefield, over 5. 4 m sq ft of mixed-use space, brownfield land £ 252 m investment 50 year lease Acquiring 4, 000 homes Building 7, 00 houses Methodist Care Homes £ 70 m long term (30 year) RPI linked lease. Transport and Logistics c£ 320 m, maturities to 30 years University of Southampton £ 93 m, 40 years income 1, 104 beds Sentinel Housing, private placement (registered social housing provider in Hampshire)

FEBRUARY 2015 LEGAL AND GENERAL PROPERTY 4 Approached with a different mindset… Applies to both in-house L&G Annuity and third party pension fund capital

FEBRUARY 2015 LEGAL AND GENERAL PROPERTY 5 A New Paradigm? “WE ARE LIVING IN THE TRANSITION FROM OUR EXISTING WORLD SYSTEM, THE CAPITALIST WORLD SYSTEM OR SYSTEMS, TO ANOTHER WORLD SYSTEM OR SYSTEMS. WE DO NOT KNOW WHETHER THIS WILL BE FOR BETTER OR FOR THE WORSE. WE SHALL NOT KNOW UNTIL WE GET THERE, WHICH MAY NOT BE FOR ANOTHER 50 YEARS NOW. ” Does Capitalism have a long term social role?

FEBRUARY 2015 6 LEGAL AND GENERAL PROPERTY The Intersection of Long Term Social Needs Long-Term Investment HOUSING CARE HEALTH

FEBRUARY 2015 LEGAL AND GENERAL PROPERTY Where are we going wrong? • Huge reliance on banks and ‘traded credit’: paper contracts that relate to loan structures created by banks • Bond yields can fluctuate dramatically (see image) based on external factors and traders’ profit taking – unlike people’s pension rates and savings • Profile of payments doesn’t grow, so doesn’t match rental growth over time • Very little account taken of fundamental properties: all about the corporate and capital structures • “All our eggs are in one basket” – RP Treasurer • How many layers between the money and the social need? 7

FEBRUARY 2015 8 LEGAL AND GENERAL PROPERTY Potential Sources of Interference in Transmitting Society’s Long Term Capital to Address Society’s Long Term Needs More Risk Care Home (Property) Investments Investment Banks HOUSING PFI’s Developers CARE HEALTH Securitisations Housing Association Debt Local Authorities and Govt Identifying and Quantifying Long Term Need Long-Term Investment Gilts (Govt borrowing) -> Grant Less Risk Some have proved themselves vital… others are only in it for themselves!

FEBRUARY 2015 9 LEGAL AND GENERAL PROPERTY Directing Society’s Long Term Capital to the Long Term Need Flexibility to take More Risk Housing Associations Care Home Operators HOUSING Contractors CARE HEALTH Long-Term Investment Grant (Govt borrowing) Local Authorities (and Govt) Identifying and Quantifying Long Term Need Or Less Risk Seeking an organic and simple transmission of Money to address Need

FEBRUARY 2015 10 LEGAL AND GENERAL PROPERTY Timing: long term investment has never been ‘cheaper’… 10 Y UK Gilt Yield (%pa) 16% 14% 12% 10% 8% 6% 4% 2% 0% 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 Source: Bank of England, 10 y nominal zero coupon gilt yield “A good to time secure long term investment”

FEBRUARY 2015 11 4 LEGAL AND GENERAL PROPERTY What might this look like? • L&G funds construction of care home, or number of care homes • Local Authority or Major RP leases these for 20 – 50 years: rent typically c. 60% of normal care home rent • Long-term (20 yr+) investment provides income for our commitments to pensioners • Typically index-linked (inflation or otherwise) income growth • Lease payments set at c. 60 -70% of gross rents, with remaining c. 30 -40% of rent retained for management, maintenance, and to generate surpluses • LA may sub-contract management and maintenance to an RP, existing operator, or in-house • L&G or LA can procure Contractor to build the homes • Depending on the lease terms, the homes can be returned to the RP or LA at lease end. Focussed on long term alignment of interests

FEBRUARY 2015 12 LEGAL AND GENERAL PROPERTY Conclusion - Institutions need to step up to the challenge of funding more of the Social Infrastructure this sector requires - New Models are required, that direct Society’s Long Term Money more cheaply and accurately to Society’s Long Term Needs - Structures should be more organic, and driven by relationships around shared values, not banks - Investments viewed as long term partnerships with an attractive social return, not driven by short term profit-making - Long term sustainability of the funding model is vital for both parties Clear alignment between funding institution and care provider