With the funding by Active Capital of eight BTR projects, it has become evident that developers are very focused on the fine balance between retaining maximum optionality and containing risk. All projects will commence with site acquisition and in most cases the site acquired will have residential zoning. A few lenders will only finance fully planned land, so the field of potential lenders at this stage is usually very limited. In the event of securing a viable planning permission, developers may explore the option to forward sell the development before the commencement of construction. They also may delay the engagement with institutional investors for a year.
The delay decision is usually found in a thought that a better price can be achieved in the future. The implications of this decision on debt funding options will likely be reflected in lesser leverage until the forward purchase is finally locked in. Regarding the developer decision tree, the problem is whether to use a self-build or a third-party contract. Many forward purchasers are seeking the risk containment strategies of third party contracting, and this has been known to come at an increased cost to the developer of the site.
There are certain expectations for the large-scale development projects being completed. It is important to keep substantial alignment between developers and lenders regarding the commercial and legal terms of the forward purchaser relationship. Both of these parties will want to see that the Forward Sale Agreement being contracted has substance. If it is a subsidiary of a larger group, the adequate intergroup guarantees must exist. Both parties will equally want to ensure that an adequate delivery is in place, which will address potential delays in construction.
It is very essential that the specification for the units to be delivered are clearly established with the purchaser. Some customers have used precedent delivered units as the template, while others fully mock-up the agreed unit. In addition to the Forward Sale Agreement, there is always a Direct Agreement between the lender and the forward purchaser. Investors in the Build to Rent sector are very risk averse, but still need to be aware of fruitful investment. There is a fine line of securing profitable investments and risking assets. In the future, high level investors will need to be aware of current market trends before entering in certain agreements. If large investors enter into agreements that have not been fully realized with risk, they have a chance of being detonated on arrival. It will be interesting to see how this affects 2021 and the years after.
Written by John Spurrier, Mortgage Analyst for Online Application