Property investors are finding new and innovative ways to maximize their return on their investments. One strategy which we are seeing used more often recently is a ‘fund-through’ transaction.
A fund through is a transaction where a property owner secures construction finance for a development from an investor who will take over ownership of the property on completion of the development, and take a coupon payment on the finance provided for the duration of the development. The property owner will manage the development and be able to access capital uplift on the transfer of the property on completion of the development.
There are benefits in a fund through structure for both property owners and long term investors. For the owners, they are able to access construction finance from an equity investor rather than a debt funder, with the investor often in a position to provide insight and input which can bring value to the transaction, while the owner can still profit from the capital uplift in the property achieved through the development.
For the investor, the development risk remains with the property owner while the investor has certainty of return, both through the development phase and into the leasing phase, because the development return to the property owner, and the rental return to the investor will be agreed up front. From an investment perspective, transactions of this nature provide strong, long term returns in new assets, which can attract investment through sustainable and modern construction and asset management processes.
Obviously, there will be risks on both sides of the transaction which need to be managed. Active project management by both parties will assist in risk management, and such transactions will tend to utilise rigourous governance structures and often require the engagement of an independent certifier to assist in ensuring that both parties’ interests are protected. This will not avoid all disputes, and ongoing relationship management an engagement between the project teams for both the property owner and the investor will be key to a positive outcome for the transaction.
Article by Mark Henderson
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