New funding ideas arrive in the UK
Published: 24 January, 2012
UK: Current methods of construction and development project funding in both public and private sectors will evolve with new ideas and sources of finance in 2012 in a bid to drive faster project progress and delivery. Pension funds are expected to become more active in the PPP sector, and the market will shift towards bond-based financing of public projects, says property and construction consultancy McBains Cooper.
Local Authorities are also pursuing innovative approaches to release value in their existing estates, such as one London Borough, with whom McBains Cooper is working, being typical of that lateral thinking – with pioneering development of private residential property for future sale funding longer-term public sector projects in the Borough.
“Construction is key to kick-starting the economy; right now, everybody in construction and development – both public and private sectors – is looking at how to make projects flow faster, and new and alternative methods of funding developed with the banks are key,” said Julian Symons, head of banking at McBains Cooper.
“In the private sector, we expect to see Far Eastern equity and debt providers becoming more active in the UK market. A lot of developments are all funded by Chinese banks - at very good rates that the European banks struggle to match – while US funds and banks will also be more active during the latter part of the year as their economy doubtless continues to improve faster than Europe.
“For private sector real estate development projects, the current market requires for substantial proportions of equity to be input alongside any senior debt, so big tranches of money have to be sourced – and international markets can be that source.
“The senior debt, up to, say a maximum of 60%, and sometimes an element of mezzanine funding, forms the balance of the funding. The variance between the methods of funding generally relates to how the equity is obtained and the various requirements this puts in place.
“Market pressures mean the level of equity required limits liquidity, and, as such, minimises the number of projects any sponsor can run simultaneously.
“Going forward, one can envisage a scenario where new lenders will enter the senior debt space, such as maybe pension funds, to supplement the reduced number of lenders.”
McBains Cooper’s Head of PPP, Clive Docwra, said: “Pension funds could also figure in the public sector where project funding and procurement routes are the subject of furious debate.
“My belief is that a variant of the Not-for-Profit PPP model, currently being promoted in Scotland, will be adopted in England.
“This will probably be in a mildly-tweaked form to address some of the issues associated with refinancing risk and future flexibility of asset use, possibly drawing funds from the banking market in the short term to cover the construction phase, with a longer-term pension fund structure refinancing at the stage that the project has achieved a benchmark level of performance, early in the operational period.
“In summary, we’re looking both east and west for those sources of funding – and they’re definitely out there.”