Legal & General has made its first foray into property lending as the insurer bids to take advantage of the gap in the market created by the retreat of bank finance.
The company will announce on Tuesday that it has agreed to provide Unite, the UK’s largest developer and manager of student housing, with a £121m loan. The move is the start of what L&G hopes to build into a multibillion-pound lending business.
It is the latest example of an insurer looking to get a foothold in the real estate financing market. The appetite among banks to hold debt secured against property has dwindled during the past two years, as overexposure to the sector and regulatory changes put pressure on new lending.
The loan also marks a watershed for L&G, which first looked at the idea of commercial property lending almost a year ago but pulled back amid worsening market conditions. The insurer held negotiations with 150 prospective borrowers before agreeing with Unite. L&G is looking to make another property loan in the coming weeks.
Ashley Goldblatt, head of commercial lending at L&G Investment Management, said the company had looked at applications that could not get lending from the banks. “We looked at a lot, but you have to wait for the right one to come along and then grab it. It is a bit like marriage.”
He added that L&G would target medium to long-term lending agreements where it could negotiate fixed rather than floating-rate repayments to match its long-term liabilities. The property lending business will be entirely financed by policyholders’ funds.
The loan to Unite, which is secured against a portfolio of student dormitories in London, Manchester and Bristol, represents a 60 per cent loan to value and is fixed at 5.05 per cent for 10 years. The cost of the loan is below the 5.7 per cent average Unite pays for its debt.
Joe Lister, Unite’s chief financial officer, said securing the loan was a testament to the strength of the company and marked an important step for it.
Insurers are tipped to become an important force in the property lending market this year and next as regulatory changes force banks to pull back.
Reforms being ushered in under Basel III – the third accord in a sequential updating of global banking regulation – will increase the cost of capital banks must hold against commercial property loans.
Both Aviva and Prudential, two of L&G’s UK rivals, already have property lending businesses.