Forward funding deals have facilitated $5.63 billion in landmark office projects across Australia in the past seven years.
According to new
CBRE analysis, this revenue has given life to 30 new towers.
Property developers such as
Mirvac have all implemented the forward funding model since 2007 to win institutional backing for large scale, institutional grade office towers.
Forward Funding Deals since 2007
CBRE’s analysis highlights Leighton as by the most active proponent of forward funding structures, having completed 11 transactions since 2007 worth a combined $2.2 billion, representing 45 per cent of the deals that have been undertaken in the past seven years.
CBRE Senior Managing Director, International Investments, Rick Butler
said forward funding deals had been critical in pushing forward city changing projects across Australia, particularly post the GFC.
“This style of funding has become increasing prevalent in real estate, driven by the absence of development finance from traditional bank lenders,” Mr Butler said.
“Buyer demand for prime office assets – both from onshore and offshore groups – has been another driver of these forward funding deals, allowing developers such as Leighton and Grocon to more efficiently use their capital to pre-sell their development projects.”
Forward funding arrangements involve an investor or fund, financing a development from its initial stages.
The investor acquires the site before the development commences and funds the expenditure as it occurs, receiving annual payments during the building phase.
The developer is meanwhile obliged to procure lease agreements on pre-agreed terms.
Last year was the most active period for forward funding deals in Australia with over $2 billion in transactions concluded, involving six separate development projects.
That momentum has continued into 2014 with German pension fund Union Investment Real Estate purchasing Flight Centre's planned new headquarters in Brisbane in a deal worth $203 million.
The largest deal for 2013 entailed the $543 million agreement on Grocon’s 480 Queen Street, Brisbane development.
The 31-storey tower was pre-sold last year to DEXUS Property Group and DEXUS Wholesale Property Fund, with Grocon providing a two-year income guarantee on any remaining vacancies at practical completion in 2016.
However Leighton was the dominant player in the market in 2013, winning investor support for $1.4 billion in projects in North Sydney, Perth and Melbourne.
These involved 567 Collins Street, Melbourne, 177 Pacific Highway, North Sydney, and Kings Square, Perth.
Pacific Highway was pre-sold to Suntec REIT for $413.19 million to facilitate the area's first new commercial building in six years.
Related Article: Leighton Properties Pre-Sells North Sydney Tower For $413 Million
Leighton Group has taken the head lease and more than three quarters of the office space in the building, which is expected to be completed early 2016.
At the time of the sale, Leighton Holdings chief executive officer Hamish Tyrwhitt said, “The sale to Suntec REIT, Singapore's second largest listed Singapore real estate investment trust by assets under management, is testament to the building's design and it is in line with our strategy to align with key investors and efficiently use our capital through pre-selling developments".
CBRE’s Debt and Structured Finance Vice President James Butler
said the benefit of forward funding was substantial given the savings in acquisition costs, particularly stamp duty.