Property development finance firms ESG focus is attracting institutional investment

By Bridging Loan Directory 12th December 2023

The increased focus on sustainability by property development finance firms is driving growing interest among institutional investors as they bid to meet their own ESG targets, according to new research from Downing’s “Building Yields and Homes” report.

Nearly two out of five (39%) of institutional investors questioned by Downing strongly agreed that the ESG focus of property development finance firms is helping to encourage more investment by institutions. Another 60% slightly agree, the research found.

Property development finance firms’ recognition of the importance of ESG is creating a virtuous circle – around 43% of institutional investors questioned strongly agree that lending to the sector is helping institutional investors to meet their ESG standards while another 56% slightly agree.

The study with UK institutional investors responsible for around £405.6 billion assets under management found nearly one in four (24%) expect a dramatic increase in the exposure of institutions to property development finance over the next five years. Another 65% expect a slight increase.

Downing’s research found institutions are potentially willing to give up yield on property backed credit investment as long as projects have very strong ESG credentials, the research among private sector and public sector pension funds, family offices and insurance asset managers, found.

Nearly nine out of 10 (89%) questioned say they would be willing to forego some yield on a project. Nearly half (48%) believe institutions would be willing to forego between 25 and 50bps in yield for a project with very strong ESG credentials.

Around 9% estimated institutions would only be willing to lose up to 10bps, while 35% estimated they would be willing to give up between 10 and 25bps. Another 8% estimated they would go as high as 50 to 100bps.

Parik Chandra, Partner and Head of Specialist Lending, Downing LLP said:

“Property development finance firms are increasing their focus on sustainability at exactly the right time to attract institutional investment.

There is a widespread recognition that property development supports institutions with their sustainability targets and there is a growing appetite from institutions to invest in the sector particularly in projects with very strong ESG credentials.”