Pension schemes and other institutional investors are set to increase their exposure to credit, with the vast majority of investors believing the sector is becoming more attractive, according to research by Downing LLP.

Its report, Building yields and homes, found that 94 per cent of UK institutional investors felt that credit investing was currently an attractive market, with 45 per cent describing it as very attractive.

Despite this, 61 per cent of survey respondents believed that institutional investors were currently under-exposed to the asset class.

Therefore, more than nine in 10 (91 per cent) expected credit allocations to rise over the next two years, with 22 per cent predicting that allocations would increase ‘dramatically’.

They predicted that, on average, 22 per cent of the portfolios they manage will be allocated to the credit market within three years, while 20 per cent forecast that 40 per cent or more will be allocated to the credit sector.

Almost two-thirds (65 per cent) felt that institutional investors should be targeting yields of more than 10 per cent from property-backed credit investments that include development risk up to 70 per cent LTV.

Downing stated that a key attraction to the credit market for institutional investors was the level of sophistication, innovation and transparency in the market, with all investors surveyed finding “dramatic improvements” in these areas recently.

Furthermore, its report found that 34 per cent preferred to invest through specialist niche investors only, while 40 per cent preferred large asset managers.

Just over a quarter (26 per cent) would invest through both specialists and large asset managers.

“Institutional investors are increasingly recognising that credit markets are attractive but many are scrambling to catch up as they are under-exposed,” commented Downing partner and head of specialist lending, Parik Chandra.

“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.”

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