Key statistics and headline takeaways:
- 86% of pension schemes forecast they will increase allocations over the next three years
- 84% of respondents believe the level of funding provided to UK residential property by defined benefit schemes will increase over the next five years
- 76% of pensions schemes expect a greater focus on ESG over the next three years
- 84% of respondents believe new government initiatives would make property development finance more attractive to defined benefit pension schemes
The first Downing LLP institutional property development report, ‘Building Back Bigger’ gauges the sentiment of 50 UK pension schemes, which collectively manage around £125.5bn. From increasing exposure to property development finance to a sharper focus on ESG, the report reveals a number of key trends and themes that will shape the future of the asset class in the years ahead.
At a top level, the findings clearly show that broad institutional adoption is set to continue apace. The quantitative analysis identifies that institutional investors are attracted to the maturing asset class due to its impressive risk-adjusted returns, diversification power, and environmental, social and governance (ESG) credentials.
The report shows that the number one driver for increased exposure to property development finance is access to attractive yields offered by the asset class. This feeds into what the report shows as a growing willingness by defined benefit (DB) pension funds and other institutional investors to invest in illiquid assets because of the premium yield they can offer.
Meanwhile, more investors are considering robust approaches to sustainability-related risks and the social utility value of ensuring an adequate supply of sustainable residential housing. And the survey results strongly reflect this growing recognition of the importance of responsible investing within the property sector.
Nine out of ten pension funds believe lending to support residential property developers will play an important role in helping DB pension schemes meet their ESG goals – with 32% of the respondents strongly agreeing with this statement.
The report also arrives during a time of elevated economic uncertainty. In the short term, there are challenges. The UK residential housing market must now brace itself for significant headwinds. Contributing to this, rising borrowing costs will add to the cost-of-living crisis and stretch affordability for property buyers.
Clearly, the mortgage market is shifting, and this will have some moderating effects on the housing market. The confluence of these economic challenges will create a stress test for the housing market, but will also exacerbate the need to address the gap in affordable residential housing through significant private and government capital investment.
Ultimately, the report shows that institutional capital is deepening its exposure to residential property development finance. And despite successive governments’ rhetoric about solving the housing crisis, a structural undersupply has created a compelling and vast annual addressable market of approximately £30bn.
What is abundantly clear from the report's findings is that property development finance is moving up the agenda for institutional investors.
To read the report and the full analysis, please download the report below.