Inside L&G’s drive to back government hubs

Last week Legal & General broke its own record for the largest investment made into a government-let property, pumping £211m into forward funding 7-8 Wellington Place in Leeds. Once finished, the 377,730 sq ft office building, being developed by MEPC, will be the new home for HM Revenue & Customs and NHS Digital, prelet on a 25-year lease. The deal, revealed by EG, marks L&G’s 10th investment into government hubs, bringing the total amount of capital it has invested in these assets to £1.5bn. These properties are managed by the Government Property Agency, set up in 2018 to oversee developments, mostly outside of London, to house public sector jobs. Why invest in hubs? What is it about these hubs that whets L&G’s appetite? Gordon Aitchison, L&G’s director of investment and development, says government properties provide long-term income streams for L&G, making them attractive assets to add to the investor’s portfolio. Aitchison says that L&G has one of the biggest annuity funds in the UK, at £55bn, and is looking for investments to match its liabilities. “These investments need to be investment-grade, index-linked and long-term, typically 20 years plus,” he says. “What we are looking to do is create products to match those liabilities. Because these [opportunities] are quite rare, we have to go out and create them. You create them by finding tenants who want something.” The GPA is one such tenant, and L&G has forward funded 10 of the GPA hub buildings, in Bristol, Birmingham, Cardiff, Liverpool, Edinburgh, Glasgow, Stratford, Salford, Nottingham, and now Leeds. ‘A win-win situation’ The set-up for both L&G and the GPA is mutually advantageous, says Aitchison. “It’s a win-win situation,” he adds. “[Government departments] can come out of these 1960s buildings, move into one big central building which is state of the art, very low rent and they’ll be there long term. “We are looking for the best and greatest covenants. The better the covenant, the more we can pay for it and the less rent they’ll pay.” He notes that HMRC has been spearheading this initiative and adds: “It’s a model that we think the government should repeat across other departments.” Regeneration opportunities Another reason L&G is so keen on the GPA hubs programme is because it presents an opportunity to regenerate regional areas. Aitchison cites L&G’s £400m redevelopment of Cardiff’s Central Square as an example of how GPA hubs can drive the regeneration of an area. HMRC’s announcement in 2016 that it had picked Central Square for its Welsh hub led to 1m sq ft of office and mixed-use development on the site of an old bus station. By using a combination of L&G share capital and annuity funds, Aitchison says funding these sorts of projects provides a unique opportunity to work alongside local authorities and “create quality products that otherwise would not have been built”. The GPA hubs programme The government’s hubs programme was launched in 2016, led by the Government Property Unit. It instructed JLL to find schemes at which it could bring civil servants together into 20 locations around the country. In April 2018, the Government Property Agency replaced the GPU and took over the programme. After the GPA’s launch, chief property officer Jane Young told EG that the GPA’s aim was to save around £3.6m over the next two decades by reducing its property estate, £2.5bn of which would come directly from its hubs initiative. Off the back of the launch, the first 14 hub locations were announced: Bristol, Birmingham, Belfast, Canary Wharf, Cardiff, Croydon, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham, Stratford. A Cabinet Office spokesman said: “Government hubs will deliver value for money for taxpayers and create a modern, flexible estate, facilitating smarter working for civil servants.”   To send feedback, e-mail lucy.alderson@egi.co.uk or tweet @LucyAJourno or @estatesgazette