Residential development finance is moving up the agenda for UK pension funds…
Institutional investors are forecasting a growing focus on real estate development finance with debt allocations to the sector set to expand over the next three years, research by responsible investment manager Downing found.
More than nine of out of 10 (94%) questioned in Downing’s study with UK institutional investors responsible for around £405.6bn of assets under management, believe allocations will increase over the next three years with a quarter (25%) predicting a dramatic increase.
Debt allocations to real estate development finance is becoming increasingly attractive to institutional investors as it offers attractive yields while also enabling investors to meet ESG goals through investing in social housing and developing residential property in underserved areas.
Downing’s research with investors working for private sector and public sector pension funds, family offices and insurance asset managers found the key reason they believe allocations will increase is because real estate development finance is an attractive way to diversify portfolios.
Around 56% rate diversification as the top reason for increasing allocations while 26% pointed to the potential for attractive yields and 20% highlighted that its risk profile is attractive relative to yield.
Almost all questioned (99%) agreed real estate development finance can play a crucial role in supporting de-risking at defined benefit pension schemes as it delivers high and stable income while also matching liability cashflows and providing strong growth.
However, property development finance companies will need to increase their focus on ESG in order to attract institutional investment, the research found. Around 93% of the investors questioned said they expect an increase in the scrutiny of the ESG credentials of property development finance firms over the next three years by institutions.
Parik Chandra, partner and head of specialist lending, downing said: “Real estate development finance is firmly established as an attractive asset class for institutional investors as it combines the potential for high yields with the opportunity to meet ESG goals.
“That is reflected in Downing’s experience and we are seeing growing interest from institutional investors in the sector.”
