Institutional investors ready to dial up credit exposure

By Newsdesk

December 08 2023
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Institutional investors are gearing up to increase their stakes in the credit sector, which they currently perceive as undervalued, according to a groundbreaking study by Downing LLP, a company dedicated to responsible investment management.

Institutional investors ready to dial up credit exposure

The research, titled "Building Yields and Homes," indicates that a significant majority of UK-based institutional investors (94%) find credit investing appealing, with nearly half (45%) considering it highly attractive.

The survey, which questioned investors overseeing approximately £405.6 billion in assets, revealed that 61% of participants believe their peers are not sufficiently invested in this asset class. Downing's study involved professionals from various sectors including private and public pension funds, family offices, and insurance asset managers, and it delved into their inclination to boost allocations, the qualities they seek in investments, and what they particularly expect from property-backed credit investments.

Anticipation is high, with over 90% (91%) of those surveyed predicting a rise in credit market allocations over the next two years, with 22% expecting a dramatic hike. On average, they foresee that in three years' time, credit market allocations will constitute 22% of their managed portfolios, with one in five (20%) predicting a hefty 40% or more allocation.

The survey also found that nearly two-thirds (65%) of respondents are aiming for yields above 10% from property-backed credit investments that carry development risk up to a loan-to-value (LTV) ratio of 70%.

One of the key draws for investors towards the credit market has been the notable advances in sophistication, innovation, and transparency, which all respondents agreed have seen significant improvements recently. The report sheds light on the increasing importance of specialized niche investors in the credit market, with about a third (34%) of institutional investors expressing a preference for specialist niche investment only, while 40% opt for large asset managers. A mix of both speciality and large-scale investment was favored by roughly 26%.

Parik Chandra, the Partner and Head of Specialist Lending at Downing LLP, emphasized the burgeoning appeal of credit markets, stating, "Institutional investors are increasingly recognising that credit markets are attractive but many are scrambling to catch up as they are under-exposed." He added that "real estate development finance is a particularly attractive sector for long-term investors despite the current tough economic conditions." Chandra also mentioned the importance of selecting partners with a strong performance history to invest through, highlighting the preference for specialists, especially in yielding investments.

Moreover, Downing's Specialist Lending team has hit a new milestone, surpassing £500 million in commitments. The team is focused on providing secured loans to property developers working on residential-led and non-speculative commercial projects, including strategic sectors like student accommodation. Downing LLP primarily offers loans from £1 million to £30 million to seasoned developers.

For further insights, the full Downing Private Credit Property Development Research: Building Yields and Homes report is accessible for those interested in the growing opportunities within the credit sector.

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