Legal and General puts its faith in return on property

British insurance giant Legal and General's recent announcements of increasing interest in UK property reflect a faith in the long-term returns to be made from housing.

With the announcement of its intention to invest £600m into a "build-to-rent" property development scheme, Legal and General has suggested that it is looking for a return of 3% to 5%.

It is interesting to see a financial behemoth entering the private rental sector but perhaps the timing, coinciding with the increase in stamp duty for second homes and a reduction in tax-breaks for property investors, is not so surprising. Industry commentators anticipate that these two moves will reduce the demand from the currently buoyant buy-to-let sector.

The move surely reflects a general belief in the inevitability of rising property values and a consequent stability in private rental costs. Price Waterhouse Coopers predicted last summer that by 2025 a quarter of all UK households would be renting privately despite Government's continued incentives to help first time buyers.

L&G is not the first large institution to enter the private rental market, but the fact that it is proposing to build its own properties and is investing £55m in an offsite manufacturing facility in Leeds to do so might cause a shiver of apprehension in the housebuilding sector.

Time will tell how this opportunistic move succeeds but, as one L&G pension holder pointed out: "I'm not all that keen on risky moves.L&G is entering three new markets all at the same time - property rental, property development and manufacturing. That seems a lot of risk all at the same time."

Posted by Anna Hern