Demand for new, high-quality industrial space is growing exponentially across the UK, and speculative development is a vital component in meeting this. To enable this, debt and equity funding is key.
Although the pandemic has made industrial the asset class of choice for investors, there is still hesitancy to fund speculative industrial property developments.
Hesitancy from banks for wholly speculative developments
At Chancerygate, our ethos is to commence construction of our multi-unit schemes even in the absence of pre-lets or pre-sales. Many of the occupiers of our smaller unit developments want certainty that the units are being built before committing to a new unit. However, this is only possible provided there is speculative funding available.
In the period following the most recent financial crash, many high-street banks’ lending matrices have prevented them from funding speculative developments due to the risk profile and amount of their capital that must allocate against such loans. Even when planning is in place, most banks see funding a development which isn’t either partially or fully pre-let or sold on day one of construction a high hurdle to overcome.
We’ve been fortunate enough to work with a select group of funders for more than 20 years. The relationships we have built with funders have been driven by an understanding of our speculative build business model and strengthened by our excellent track record of delivery. However, the quantum and fire power of these funders is relatively limited.
An increased appetite for industrial as an investable asset class
The pandemic has been a key driver in seeing industrial property becoming a go-to asset class investment from funders, due to demand for new, high-quality space. Businesses have made fundamental changes to their business operations, such as amalgamating office and warehousing spaces into one industrial unit, which has created a demand for industrial space.
Residential property remains high on the list for investors. However, question marks linger over whether either retail or office space are as investable asset classes as they perhaps once were.
With the appetite for standard income producing industrial investments being seemingly insatiable, we expect the appetite for funding speculative development to increase. As we move out of any pandemic restrictions and with occupational demand at all-time highs, the risk return balance and investment metrics of speculative industrial development will become more palatable to funders.
Gaining trust through our investment and business model
Giving a lender belief and conviction in your business plan is a critical part in securing funding. Market reports need to demonstrate the compelling supply / demand dynamic for new, high-quality industrial space in those areas and technical due diligence must clearly demonstrate how development risks have been managed and mitigated.
In these instances, we “put our money where our mouth is” through investing in the project alongside our equity partners to show our commitment to undertaking the speculative development. This, partnered with our track record, enables us to become a trusted partner for a potential funder.
A multi-unit scheme is also a beneficial factor to potential funders. If a comparison is drawn to a ‘big box’ development comprising one or two units, the success or not of a scheme is binary, with a far greater implication of units being unlet or unsold. The risk is much less with multiunit schemes with small / mid-sized units that can appeal to a wider occupier base and allows diversity of risk through the granularity of the schemes.
We often deliver schemes with individual units available for purchase by owner occupiers. These tend to attract earlier commitment from occupiers and small investors allowing for early sales that rapidly reduce the bank’s loan which can often be repaid at completion of development.
Funding from outside of banks
Banks aside, the strength of the industrial market means there are alternative debt funding opportunities. Institutional investors are continually looking to invest in new Grade A stock which is very challenging and competitive to buy on the open market, so are open to looking to providing forward funding for speculative industrial development.
Regional development funds, which allocate funding for schemes within specific areas of the UK, can also help support fund speculative development. Previously, we have agreed funding from the Chrysalis Fund in Liverpool, The Scottish Partnership for Regeneration in Urban Centres (SPRUCE) and the West Midlands Combined Authority.
The right partnership for all parties
The appetite for funding speculative development is increasing as the industrial occupational market continues to strengthen. There is recognition from funders that there is significant investment demand from institutional investors and this will only be satisfied with new developments coming through.
Newer lenders are coming into the market but still offering higher rates compared to our existing funders on speculative development. As competition and demand increases, it is expected that these rates to be lowered.
At Chancerygate, having a funder that understands our business model is key. Our track record and expertise can help give confidence to funders that speculative development is a sensible balance of risk and return for them.
Chancerygate has extensive experience in working with banks, institutional investors and regional development funds to enable speculative development in strategic locations.
Find out more about some of the investor partners we work with here, or for more information on our funding requirements, contact James on t: 020 7657 1850 or e: jdeane@chancerygatye.com.
