Introduction
Co-investment is a new model of investing by institutional investors in the UK Build to Rent industry. Unlike the traditional forward fund approach, co-investing takes the form of joint development where both investors and developers contribute their capital and expertise to a shared equity project.
Co-investment has three key functions: it develops new build assets, provides an exit strategy for sovereign wealth funds and institutional investors who want to diversify their portfolios, and provides more liquidity on an asset class that typically lacks it. This article will explore why this financial structure is sweeping across Europe’s largest real estate market – London – as well as how co-investors can leverage their investments to benefit from these returns at scale.
The Traditional approach: Forward Funding
The traditional forward fund approach is a strategy that’s been used in the UK Build to Rent industry for institutional investors for years. This model has been utilized by investing at one point in time in larger projects to capture the benefits of a return on investment.
Simply put a forward funder will purchase or provide a developer or contractor with a parcel of land to develop as the first stage of the investment. The funder will then reimburse construction costs of the BtR development and complete and take over the finalized development once the building is complete and usually pay a profit payment to the contractor or developer.
The benefit of the traditional forward fund approach is that it has provided investors with a slow release of liquidity on an asset class that typically lacks such liquidity. The disadvantage this has is the bureaucracy of both developer contractor and the investor having alternate motives and value metrics of “the success of the development” whereby the contractor may wish to increase costs through the development where possible while the investor will look to do the opposite.
The Co-invest model
Co-investment is a new model of investment by institutional investors in the UK Build to Rent industry. Unlike the traditional forward fund approach, co-investing takes the form of joint development where both investors and developers contribute their capital and expertise to a shared equity project.
This could be on a 90% to 10% basis whereby the investor invests 90% of the capital required and the developers invest 10%
The main benefit of joint development is that a shared equity project provides a way for both the investors and developers to get their capital back and share in any uplift in values and profits as well as development savings. This leads to a stronger, more open relationship between both parties build on mutual trust that comes from aiming for a common goal.
Final Thoughts
Co-investment opportunities within the UK Build to Rent industry can help create stronger long-term partnerships between parties by building trust. Co-investing, unlike forwarding funding, is a model where both investors and developers contribute their capital and expertise for shared equity projects on an equal basis. This approach has been proven successful in London’s largest real estate market as well as generating returns at scale when done right. For those looking to invest or partner with developers across Europe’s largest real estate market – London – you should consider co-investing your money into joint development structures that provide benefits of liquidity while also developing new build assets.
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