Forward funding in the real estate market is a type of funding arrangement where an investor (often an institutional investor like a pension fund or REIT) agrees to finance a development project before construction is completed, and often even before it starts.
Key Characteristics of Forward Funding:
- Investor Pays in Stages: The investor funds the development in tranches, typically tied to construction milestones.
- Developer Transfers Risk: The developer reduces their financial risk and receives capital as the project progresses, rather than relying solely on loans or their own equity.
- Ownership Transfers Early: The investor usually acquires the land or development rights upfront, and full ownership of the completed asset is secured upon completion.
- Pre-agreed Purchase Terms: Unlike speculative development, the terms (price, design, tenants, etc.) are agreed upon before construction.
Advantages:
- For developers: Reduces financial burden, de-risks the project, and ensures a buyer is secured.
- For investors: Secures high-quality assets often at a better yield than buying completed developments, and allows input into design/specifications.
Typical Uses:
- Common in build-to-rent (BTR), logistics, student housing, and office developments.
- Often used when long-term tenants are pre-secured, improving the asset’s investment profile.
