Residential · Structures
Forward funding vs. traditional residential development
Forward funding gives institutional investors access to residential projects UNDER construction — often at a 10-25% discount versus stabilised acquisition. In return, the investor carries part of the construction and lease-up risk. This guide covers structures, IRR levels and when forward funding is the right choice.
What is forward funding?
Forward funding means an institutional investor (pension fund, family office) signs a binding purchase agreement with a developer BEFORE construction is complete. The investor pays in milestones tied to construction progress and takes over the finished project at delivery.
The structure became popular in the UK in the 2010s and is now standard for large residential projects in the Nordics. In Denmark, forward funding is mostly used for projects with 200+ units, where traditional bank financing is difficult to structure at full development cost.
Three primary structures:
- Forward funding — investor finances construction via fixed purchase price
- Forward purchase — investor commits to buy at delivery, but does not finance construction
- Joint venture — investor and developer share risk and return
Forward funding vs. traditional (stabilised) acquisition
Which structure matches your mandate profile?
| Criterion | Forward funding | Traditional (stabilised) acquisition |
|---|---|---|
| Price vs. market value | 10–25% discount | Market price |
| Expected IRR (10-15 yrs) | 7.5–10.0% | 5.0–7.0% |
| Construction risk | Yes (but structured) | No |
| Lease-up risk | Partial (lease-up period) | No (already let) |
| Capital deployment time | 12–24 months | 4–8 weeks |
| Cashflow start | After delivery (12–30 m.) | Immediate |
| Developer covenant | Critical (parent guarantee) | N/A |
| SFDR classification | Easier (designed for compliance) | Depends on existing asset |
Forward funding is the only place a pension fund can rationally maintain 8%+ IRR on Danish residential — provided the developer is solid and the structure is set up correctly.Olrik Investment, forward funding practice 2024-2026