Debt Markets Just Don't Get Big Real Estate Projects, Developers Warn

The global credit market doesn't get real estate like it used to.

The rise of a new breed of lender, driven by the growth of the private credit sector, is making large-scale projects increasingly difficult to fund, Bisnow’s London Real Estate Outlook Conference 2025, held at Battersea Power Station's 50 Electric Boulevard, heard. 

The complexities of front-ended costs and the requirement for a long-term vision mean major urban developments, which provide much-needed homes, cultural and business space, have become higher-risk and more challenging to finance, with a dwindling number of potential investors. 

“There's been a real change in who's running the show in capital markets," Yoo Capital co-founder and managing partner Lloyd Lee said. 

"There was a time, maybe one and a half to two cycles ago, when you could have a sensible real estate discussion because the guy across the table in the credit committee understood that a south-facing window is worth more than an apartment that faces north."

In an world where lenders have a background in credit rather than real estate lending, "that guy does not understand the difference between this building and the one down the street," Lee added.

As far as he's concerned, it's about the market report, credit environments, interest rates, geopolitical risk and major sector reports.

"There’s no discernment anymore at the granular level,” Lee added.

That is important because debt funds are critical to the real estate development world. They provided 62% of all speculative financing, 32% of residential development funding and half of development finance for alternative asset classes, totalling 57% of commercial development finance, according to the most recent Bayes Real Estate Research Centre report.

When asking for major tranches of debt for a major project, Lee warned that there is no one “who is genuinely a nose-to-the-grindstone real estate person anymore," meaning that there is what he described as a “decoupling at the table."

As a result, stakeholders who understand what the real estate industry does have become extraordinarily important, even more than 10 or 15 years ago, he said, because there are fewer in the market.

“The geopolitical headwinds are tough, they're real. And as a result, you need the resilience, the patience, but also you to have your own sense of conviction that I will get through this,” Lee said.

Earls Court Development Co. Director of Development and Masterplanning Ben Giddens pointed to three key elements in meeting the challenge of cash flow in major projects that have a large infrastructure burden during the early stages of development.

He stressed the importance of public-private partnerships, with a public sector that can “warehouse the land cost, so you draw down parcels as and when needed," plus visionary shareholders with patient capital, citing its pension fund APG at Earls Court.

Thirdly, he pointed out the need for a mixed-use development to emerge from what he dubbed a “debt bath."

“Your cash flow crashes massively in the early phase with your infrastructure costs, and you're in this debt bath that's only getting deeper with the interest rolling up," Giddens said. "So, you need to crawl out of that debt bath and turn on the income taps to float yourself out. You need your range of uses, so that you can really recover and pay down your infrastructure costs as soon as you can."

For Earls Court, he pointed to cash generation through first phase open market sales, student accommodation, later living, build-to-rent and offices, which can all move forward at the same time and enable the payback of infrastructure as soon as possible.

Stanhope Head of Investment Joe Binns said large regeneration projects and big master plan place creation have moved away from an anchor approach, such as having a single John Lewis department store or a big single-office tenant.

As a result, he said a lot of the elements being put in at an early stage to build momentum are becoming increasingly costly. Working with operators and providers to create place can have quite a long payback because they are reliant on footfall before the scheme starts to make money. 

“The problem we have is that there is very little long-term, patient capital around because of the environment we're in," Binns said. "So when you start to model this from a private equity perspective, who need to see a return in a closed-ended fund, these types of developments we are working on really doesn't make sense."

At the moment, given the risk appetite for real estate among global institutional investors, private equity is one of the few sources of capital active. So long-term projects aren't getting funded. 

Battersea Power Station Development Co. Chief Design Review Officer Marina Chung said the southwest London megaproject has another 16 acres to develop and that it is critical for the developer to have the right partners and the right tenants and residents.

“We've sunk a lot of cost in here," she said. "And it's not just infrastructure. We've restored a heritage building, and we are now transitioning, transforming from place making. But more importantly, as we look into the future for the next 10 years, we're looking at place growth with value growth, and that's how we will be looking to climb out of the bathtub,” she said.

The next phase takes Battersea Power Station to 2035, and Chung said the developer has a clear road map supported by its shareholders in Malaysia, who she described as fundamental to the success of this project.

“We have set the foundations, and we will keep going with the place making,” she said.