Student accommodation
Forward funding
Forward funding is a way of financing a development in which the investor who will keep the building pays for the construction as it progresses, instead of buying it finished. The developer builds without looking for a loan, and the investor takes on part of the construction risk in exchange for coming in early.
Also known asforward fund · forward-funded development · forward-funding
How it works
The usual structure has three steps. The investor buys the land, or the developer transfers it, and the two sign a development agreement setting out the design, the timetable and the budget. The investor then pays for the construction in stages, against certified progress on site. And when the building is handed over, the developer receives its profit and the investor holds an asset that has been its own from day one. Compared with a forward purchase, where almost everything is paid at the end, here the money goes in during construction: the investor carries more risk, and so usually expects a somewhat higher return. What gets negotiated most:
- Who pays for cost overruns and what happens if handover is late.
- When the developer receives its profit, and whether it depends on finishing on time or on filling the first academic year.
- Who chooses the PBSA operator and at what point it joins the project.
- Which permits have to be granted before each payment.
In student accommodation it is one of the usual routes for building a new PBSA scheme, in the United Kingdom as well as in Spain. It has an advantage that does not show in the accounts: because the investor, and sometimes the operator, are there from the start, decisions that cannot later be changed without building works can be made in time, such as the mix of studios and cluster flats, where reception goes or how much space is left for common areas.
Sources
Related terms
- PBSAPBSA (purpose-built student accommodation) is a student residence built or refurbished for that use and run by a private operator, with rooms or studios, shared areas and services. The term comes from the British market, and in Spain it is used mainly by investors and operators.
- YieldThe yield of a property is the ratio between the annual rent it produces and what it is worth. It is used to compare buildings with each other and with other investments, and to value a purchase: the safer the income looks, the lower the yield a buyer will accept.
- Forward purchaseA forward purchase is the purchase of a building under construction, agreed before or during the works and paid almost entirely on completion. The developer funds the construction itself, and the investor secures the asset without taking on the construction risk.