The future of funding in real estate development

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Summary: There is no doubt that the development market remains challenging, not only for developers, but also for the banks and investors. With low interest rates and a shortage of available prime assets, combined with a potential "double dip" recession, there are both opportunities and uncertainties about how this year will progress.

Our statistics on the future of funding in the development market is based on a survey of 100 of our clients from across the real estate market, including developers, banks and investors. The most promising theme to emerge is a consensus in favour of a shift in the approach to development finance, with all respondents welcoming moves towards joint venture arrangements and equity participation. Some of the key findings include:

  • 37% of developers say the availability of finance is the biggest barrier to starting development
  • 50% of banks say they are offering development finance, but only to experienced developers and with a significant pre-let
  • Over 50% of developers say development will not restart until at least spring 2011
  • 90% of investors say they would look to JV with a developer, but location and level of returns are key to them deciding to invest

Whilst there continues to be some caution from all parties on development restarting in earnest, there are growing signs of optimism. The government may be unlikely to be able to do much in the short-term to encourage investment, but by shifting the way schemes are funded there is a clear way forward. As the statistics highlight, with joint venture structuring identified as one of the key ways to break the funding deadlock, greater understanding around the risks and opportunities could prove to be the answer.

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