Forward Funding in Property Development: Pre-Selling to Investors

Forward funding is a development structuring mechanism where an institutional investor commits to purchasing a completed development at an agreed price before construction begins, and provides the capital to fund the construction. The developer acts as a development manager, delivering the scheme to an agreed specification on behalf of the investor, and receives a development management fee plus a share of any profit above an agreed threshold. This structure fundamentally changes the risk profile of a development because the end buyer is committed from day one, eliminating both sales risk and much of the finance risk.

In a typical forward-funded deal, the investor purchases the site from the developer at the agreed land value and provides construction funding as the build progresses. Legal title to the property passes to the investor on day one, meaning the development is technically being built on the investor's land. The developer enters into a development agreement and a building contract that govern their obligations to deliver the scheme to the required standard, on time, and within budget. This structure is most common in the build-to-rent sector, student accommodation, and large-scale commercial developments where institutional investors are actively seeking pipeline product.

We have seen forward funding become increasingly prevalent in the UK market over the past five years as institutional investors have sought to deploy capital into residential and mixed-use developments. The total value of forward-funded residential transactions in 2025 exceeded £4 billion, driven by the growing build-to-rent sector and institutional appetite for long-income residential assets. For developers, forward funding offers a route to delivering larger schemes with significantly less capital at risk. However, the trade-off is a reduced profit margin compared to a developer-led scheme funded through traditional development finance.

A forward-funded deal involves several key contractual elements that define the relationship between the developer and the investor. The first is the purchase agreement, under which the investor agrees to acquire the completed scheme at a price typically derived from the expected net operating income capitalised at an agreed yield. For a build-to-rent scheme expected to generate £500,000 per annum in net rent, capitalised at a 4.5% yield, the purchase price would be approximately £11.1 million.

The second element is the development agreement, which sets out the developer's obligations to deliver the scheme to the agreed specification, programme, and budget. This agreement typically includes a fixed development cost that the investor will fund, a development management fee for the developer (usually 1-3% of total development cost), and a profit share arrangement. The developer may receive 50% of any profit above a hurdle return for the investor, typically 6-8% per annum on deployed capital. On a £10 million scheme where total development cost is £8 million and the investor's target return is 7%, the profit available for sharing would be approximately £2 million minus the investor's hurdle return of approximately £840,000 over 18 months, leaving approximately £1.16 million to split.

The third element is the building contract, usually a design-and-build contract between the developer's building company and the investor's SPV. This contract provides the investor with the warranties and protections they need regarding build quality, programme, and defects liability. The developer must also provide performance bonds or parent company guarantees to secure their obligations under the building contract. We advise developers to engage specialist development solicitors who are experienced in forward-funded structures, as the documentation is considerably more complex than a standard development finance arrangement.

The primary advantage of forward funding is the dramatic reduction in capital at risk. In a traditional developer-led scheme, the developer must fund the equity contribution (typically 20-30% of total costs) and assume the risk of cost overruns, programme delays, and sales risk. In a forward-funded deal, the investor provides all the capital, and the developer's risk is limited to their performance under the development agreement and building contract. A developer delivering a £15 million scheme through forward funding might have less than £500,000 at risk, compared to £3 million to £4.5 million in a traditionally funded structure.

This capital efficiency allows developers to pursue multiple large-scale projects simultaneously without the equity constraints that typically limit growth. We have worked with developers who were delivering one project at a time using traditional finance but, after transitioning to forward funding, were able to run three or four schemes concurrently. The absolute profit per scheme is lower under forward funding, but the portfolio-level return on the developer's capital is often dramatically higher because they are generating management fees and profit shares from multiple projects with minimal equity deployed.

A secondary advantage is speed and certainty. Forward-funded deals typically close faster than traditional development finance because the investor is motivated to deploy capital and has their own streamlined due diligence process. There is no need to arrange separate senior and mezzanine facilities, negotiate intercreditor agreements, or satisfy multiple lender covenants. The developer deals with a single counterparty who is both the funder and the end buyer. For developers who value simplicity and speed, forward funding can be transformative. To explore whether forward funding suits your development pipeline, submit your projects through our deal room.

Forward funding works best for schemes that match institutional investor criteria: large-scale, purpose-built, in strong locations, with predictable long-term income characteristics. Build-to-rent developments of 50 or more units in major cities, purpose-built student accommodation near Russell Group universities, and large-scale logistics or distribution warehouses are the prime candidates. These asset types attract institutional capital because they generate predictable, inflation-linked income streams that match pension fund and insurance company liabilities.

Forward funding is generally not suitable for small residential schemes intended for individual sale. Institutional investors have minimum ticket sizes, typically £5 million to £10 million, which excludes most small-scale residential developments. Similarly, schemes in secondary or tertiary locations may struggle to attract forward-funding interest because institutional investors focus on prime and good secondary markets where rental demand is robust and liquidity is high. A 12-unit apartment scheme in a market town, however well-designed, is unlikely to attract a forward funder.

Developers also need to consider whether the reduced profit margin under forward funding is acceptable. In a traditional developer-led scheme, the developer retains all profit above their cost base. In a forward-funded deal, the investor typically captures the first 6-8% return, and the remaining profit is shared. On a scheme where a traditional approach would yield a 22% margin on GDV, the developer's share under forward funding might equate to just 8-12% of GDV. For developers who prioritise capital efficiency and pipeline growth over per-project profit, this trade-off makes sense. For those seeking to maximise the return on a single project, traditional capital stack structuring with development finance remains the better option.

The forward-funding market in the UK is dominated by institutional investors including pension funds, insurance companies, sovereign wealth funds, and specialist residential investment vehicles. These investors typically deploy through dedicated real estate teams or through fund managers who source and manage investments on their behalf. Accessing these investors directly can be challenging for developers who do not have existing institutional relationships.

The most effective route to forward-funding partners is through specialist advisors who maintain relationships with active institutional investors and understand their current acquisition criteria. These advisors can match your scheme to the most suitable investors, manage the competitive tension between multiple interested parties, and negotiate the deal terms on your behalf. Advisory fees for forward-funding introductions typically range from 1-2% of the transaction value, which is a meaningful cost but is often offset by the better terms achieved through a competitive process compared to a bilateral negotiation.

We maintain relationships with over 30 institutional investors who are actively seeking forward-funding opportunities across the UK. Our knowledge of each investor's current criteria, geographic preferences, minimum lot sizes, and target yields allows us to identify the two or three most suitable partners for any given scheme within days. This targeted approach saves developers months of speculative approaches to investors who are not interested or not competitive. For developers with schemes that meet the institutional criteria, we can typically introduce forward-funding partners within four to six weeks and have indicative terms agreed within eight weeks.

While forward funding transfers many risks from the developer to the investor, the developer retains significant obligations and risks that must be carefully managed. The primary risk is construction delivery. The developer is contractually committed to delivering the scheme to an agreed specification, within an agreed budget, and by an agreed date. Failure to meet any of these commitments can result in liquidated damages, forfeiture of the profit share, or in extreme cases, the investor terminating the development agreement and appointing an alternative contractor to complete the works.

Cost overrun risk is typically borne by the developer. If the agreed development cost is £8 million and the actual cost comes to £8.5 million, the developer must fund the £500,000 shortfall from their own resources. This is why obtaining a fixed-price building contract from a reputable contractor before entering into a forward-funded deal is essential. Without cost certainty, the developer is exposed to unlimited downside risk on construction costs, which can quickly erode the management fee and profit share that make the deal worthwhile.

Programme risk is equally significant. Forward-funded deals typically include a longstop date by which the scheme must reach practical completion. If the developer fails to complete by this date, the investor may have the right to step in and take control of the project, or to claim liquidated damages calculated as the investor's lost rental income during the delay period. On a scheme expected to generate £40,000 per month in rent, every month of delay costs the developer £40,000 in damages. We advise developers to build at least a three-month buffer into their programme when negotiating the longstop date, as construction delays are common and the consequences under a forward-funded agreement are severe.