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, according to research by investment manager Downing.
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Of the institutional investors surveyed, 94% said they believed debt allocations would increase over the next three years, with a quarter (25%) predicting a dramatic increase as they said real estate development finance was an attractive way to diversify portfolios.
Downing also noted that debt allocations to real estate development finance offered attractive yields while also enabling investors to meet environmental, social and governance (ESG) goals by investing in social housing and developing residential property in underserved areas.
Around 56% rated diversification as the top reason for increasing allocations, while 26% pointed to the potential for attractive yields and 20% highlighted that its risk profile was attractive relative to yield.
Almost all of those questioned (99%) agreed real estate development finance could play a crucial role in supporting de-risking within 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, according to Downing. Around 93% of the investors questioned said they expected an increase in the scrutiny of the ESG credentials of property development finance firms by institutions over the next three years.
Parik Chandra, partner and head of specialist lending at 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.”
Downing’s study included UK institutional investors working for private sector and public sector pension funds, family offices and insurance asset managers, responsible for around £405.6bn of assets under management.
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