Institutional investors set to ramp up development finance interest

Research from Downing with UK institutional investors responsible for £405.6bn of assets under management (AUM) revealed that 94 per cent predicted an increase in demand for real estate finance. 

A quarter of respondents said the increase would be “dramatic”. 

The investors, who work for private and public sector pension funds, family offices and insurance asset managers, believe this will rise because real estate finance is a good way to diversify asset portfolios. 

It is believed that the investment will be attractive due to the potential yields and ability to meet environmental, social and governance (ESG) goals by investing in social housing and developing residential properties in areas in need of housing. 

Downing’s research found that rate diversification was named as the main reason for investing in real estate, according to 56 per cent of responses, while 26 per cent cited yields. A fifth said the risk profile relative to yield could motivate investment. 

Some 99 per cent said investing in real estate development could help to de-risk defined benefit pension schemes as it offered “high and stable income” while matching liability cashflows and growth. 

Some 93 per cent of respondents predicted the scrutiny of ESG credentials would increase 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 specialist lending division provides funds to investors and property developers to deliver residential-led schemes and commercial developments. The specialist lending team has made commitments of more than £600m since its establishment. 

The lender lends between £1m and £30m to developers up to 90 per cent loan to cost and 70 per cent loan to gross development value. It can lend more on a case-by-case basis.