Defined benefit (DB) pension funds will increase allocations to real estate finance development as an asset class as they search for attractive yields and ways to meet their ESG goals, according to new research from investment manager Downing LLP.
Its study with UK pension funds, which collectively control around £125.5 billion in assets under management, found that 86% expect DB schemes to increase allocations to real estate development finance as senior debt over the next three years.
Nearly one in five (18%) expect a dramatic increase in allocations with DB schemes attracted by the opportunity of higher yields and the opportunity to meet ESG goals by funding social real estate or supporting the development of local residential property for instance.
Downing’s research found almost all (96%) of pension fund executives questioned agree that real estate can play a crucial role in helping DB schemes with de-risking by delivering high and stable income while also matching liability cashflows and providing growth to help close deficits.
More than half of those questioned (52%) said yields were the key driver for increased allocations to real estate development finance over the next three years followed by 50% who identified real estate development finance’s role in diversifying scheme portfolios.
The table below shows the views of pension funds on the main reasons driving the popularity of real estate development finance as an investment with DB schemes.
Parik Chandra, Partner and Head of Specialist Lending, Downing LLP said: “Real estate development finance is clearly moving up the agenda for pension scheme managers.
“Forecasts of increased allocations underline its growing attraction to defined benefit pension schemes who recognise a wide range of positive attributes it can deliver.”
Downing’s tested investment approach targets attractive yield through a safety-first lens and focuses on delivering residential development and bridging finance to experienced developers.
Its institutional-grade investment process ensures it maintains a genuine senior debt profile and it focuses on relationship-based sourcing, working with well-known, experienced counterparties.
It offers diversification across the UK, with a focus on opportunities with good liquidity, deeper markets or those with structural undersupply.