UK institutional investors set to boost exposure to credit

Written by Adam Cadle

05/12/2023

Institutional investors are set to increase their exposure to credit as the sector becomes more attractive with most believing they are currently underexposed, a new report from Downing LLP has found.

The 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 report also found 61% believe institutional investors are currently underexposed to the asset class. A key attraction of the credit market for institutional investors is the level of sophistication, innovation and transparency in the market, the report showed.

More than nine out of 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.

The report also 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 at 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.”

Downing commissioned independent research company PureProfile to interview 100 UK institutional investors focused on credit working for private sector and public sector pension funds, family offices and insurance asset managers using an online methodology during August 2023. More than half work for institutions managing more than £3bn in assets.

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