We are delighted to have released our second annual report on the UK residential property development market which highlights the sector’s resilience and the continued opportunity for returns. Our survey of 100 institutional investors, consisting of insurance asset managers, family offices, and public and private pension schemes, collectively managing £405.6 billion of assets uncovered an enduring appetite for the asset class – even in the face of a continued shortage of supply of new homes and buyer affordability challenges.

Our research for the newly released report "Building Yields and Homes” found almost all UK institutional investors questioned (94%) believe credit investing is currently attractive with 45% describing it as very attractive.

However, the study with investors responsible for around £405.6 billion assets under management found 61% believe institutional investors are currently under-exposed to the asset class.

Downing’s research with investors working for private sector and public sector pension funds, family offices and insurance asset managers looked at their appetite to increase allocations as well as what they look for from investments and particularly from property-backed credit investments.

More than nine of out 10 (91%) questioned expect allocations to the credit market to increase over the next two years with 22% forecasting allocations will increase dramatically.

On average, they predict that within three years 22%of the portfolios they manage will be allocated to the credit market with a fifth (20%) forecasting 40% or more will be allocated to the credit market.

Nearly two out of three (65%) questioned believe institutional investors should be targeting yields of more than 10% from property-backed credit investments which include development risk up to 70% LTV.

A key attraction of the credit market for institutional investors is the level of sophistication, innovation and transparency in the market, the report shows. All investors questioned agreed there have been dramatic improvements in these areas recently.

The report highlighted the growing role of specialist niche investors in the credit market. Around one in three(34%) institutional investors prefer to invest through specialist niche investors only, while 40% prefer to invest with large asset managers. Around 26%would invest through both specialists and large asset managers.

Parik Chandra, Partner and Head of Specialist Lending, Downing LLP said: “Institutional investors are increasingly recognising that credit markets are attractive but many are scrambling to catch up as they are under-exposed.

“Real estate development finance is a particularly attractive sector for long-term investors despite the current tough economic conditions. Investors however need to careful when selecting partners to invest through and need to focus on the yields they can expect which explains the growing preference for specialist partners with strong track records.”

Download the full report here