How alternative financing structures open up new scope for action for project developers in a restrictive financing environment
Today, good projects fail less and less on the market – but increasingly because of financing.
The land purchase contract has been signed, the building permit has been issued and the profitability calculation is convincing. Nevertheless, the project is not progressing. Not because there is a lack of demand or concept, but because under the current market conditions it is not possible to realize financing that takes into account speed, equity requirements and risk profile in equal measure.
Today, we regularly encounter this situation in exchange with project developers, banks and institutional investors. The decisive success factor is no longer just the quality of a project – but the quality of its financing structure. This reflects a fundamental change in the German project development market.
The bottleneck has shifted
For a long time, the focus of financing was on one question in particular: How cheaply can capital be raised?
Today, this consideration falls short. Higher financing costs, rising construction costs and more restrictive lending have fundamentally changed the framework conditions. Banks are acting more selectively, capital requirements are increasing and financing processes are taking longer.
The real bottleneck of many project developments is therefore no longer on the market side, but on the financing side. Today, financing not only determines the costs of a project, but increasingly its feasibility.
Financing does not start with the bank
In many projects, we observe a similar picture: land is secured, building rights are available and the calculation is viable – yet implementation is delayed.
The reason is simple: Financing can no longer be organized at the end of a development process. It must be taken into account as early as the conception phase.
This is because the capital structure influences key success factors at an early stage:
- the required equity investment,
- the speed of implementation and transactions,
- the financing leeway during development,
- the flexibility of the capital structure,
- as well as the probability of a successful exit.
Financing has thus become a strategic component of project development.
More room for manoeuvre through alternative financing structures
Against this background, alternative forms of financing are becoming increasingly important. Not as a substitute for classic bank financing, but as a useful addition.
Private debt is a good example of this. While banks are subject to regulatory requirements and standardised credit processes, institutional debt investors often have greater flexibility in terms of structuring, decision-making processes and financing structure.
This flexibility can be crucial, especially in the case of time-critical land acquisitions, increased equity requirements or bridge-to-exit situations.
This is not about using as much debt capital as possible. Rather, a financing structure that supports the success of the project is decisive. Therefore, private debt should not be valued solely on the basis of the interest rate. The decisive factor is the overall economic impact on the project. Financing that makes a project possible or accelerates it in the first place can be the economically better solution despite higher financing costs.
Financing becomes a competitive advantage
Today, project developers operate in a market in which speed, financing security and the ability to structure are increasingly decisive for the success of projects.
The decisive question is therefore no longer:
“How cheap is the financing?”
But:
“Which financing structure creates the best conditions for successful project implementation?”
Those who strategically plan financing at an early stage and intelligently combine different sources of capital not only gain flexibility. At the same time, it increases the probability of successfully implementing projects in a predictable and successful manner.
Our conclusion
The project development market currently suffers not from a lack of good projects, but from a lack of suitable financing structures.
Today, financing is much more than raising capital. It influences equity commitment, project planning, implementation speed and exit in equal measure.
Not every project development requires private debt. However, every project development requires a financing strategy that meets the changed market conditions.
This is precisely what we see as the task of modern financing consulting: not only to support project developers in accessing capital, but also to develop financing structures that make projects feasible in the first place.
Would you like to exchange ideas about current financing options or receive our white paper “Private Debt – Financing Gaps in the Project Development Market and Alternative Solutions”?
We look forward to the exchange.
