Trends in financing real estate development

The emergence of ‘super-funds’ over the last few years is evolving the way real estate development is financed. Ambitious developers can now seek development and re-positioning funding for a portfolio of assets - rather than just piecemeal deals. This trend is creating opportunities for developers, while limiting and changing the role of banks.

The role of ‘super-funds’

Over the last 12 months, ‘super-funds’ - most likely to be more aggressive Sovereign Wealth Funds or top tier Private Equity funds - have acquired majority stakes with developers and operators for specific asset classes.

The attraction is the ability to acquire a pipeline of deals in one swoop, along with the opportunity to accelerate development plans using access to equity and internal debt funds. With this greater control over the portfolio, adopting the right branding and asset management strategy becomes a key tool for funds to increase the value from their investments and secure higher returns.

European real estate is set for big change in 2017

Funds are most active during cycles of economic and political change. With elections in France and the Netherlands, and the BREXIT deal to be negotiated, European real estate is expected to be particularly impacted by this trend.

Alternative asset classes will be the vogue

The focus is shifting from traditional asset classes; there is an emerging trend around student accommodation and industrial developers/operators have started to be owned by funds. In Europe, I expect to see funds focus their attention on leading developers of sustainable commercial offices, data centres and pre-fabricated housing units.

The changing role of banks

The options for traditional banks are becoming more limited to funding individual schemes for emerging developers at a riskier stage in their corporate evolution. Alternatively, banks are being asked to fund one-off, major innovative schemes linked to regeneration of the public realm. To ensure low-risk, profitable investments, banks need to fight back and I expect to see more banks looking to secure deals with promising developers by signing them up to longer term funding agreements.

What to expect next?

Strong partner agreements enable speedier real estate development and re-positioning programs. In Europe, the next steps could be increasing transparency of second tier developers for investors and banks that are willing to sign up to a portfolio of deals for partnerships.

Matthew Cutts

Global Sector Leader - Financial Institutions Ask me a question