Co-Investing In Property Development: A Guide For Investors

Co-investment lets private investors put capital into a development scheme alongside a developer. Instead of buying a finished property, you fund part of the cost of creating new homes and share in the outcome. It can be a way into development without running a site yourself, but it carries very different risks from buying a buy-to-let.

This guide explains how co-investment usually works and what to check before committing.

How a development is funded

Most residential schemes are funded with a mix of debt and equity, often called the capital stack:

• Senior debt: a development loan secured on the site, repaid first.
• Mezzanine or stretched senior debt: additional lending that ranks behind the senior loan, at a higher cost.
• Equity: the developer’s and investors’ own money, repaid last, after all lenders.

Co-investors usually sit in the equity. That means you are repaid after the lenders, and you carry the first loss if costs rise or values fall. In return, equity takes a share of the profit rather than a fixed interest rate. Our article on how property development is funded shows illustrative examples of how these layers fit together.

Common co-investment structures

• Joint venture company: a special purpose vehicle (SPV) is set up for one scheme, and the developer and investors hold shares in it.
• Profit share: investors receive an agreed share of profit once costs and debt are repaid, sometimes after a preferred return.
• Equity loan: investors lend to the SPV on terms that include a share of profit.

Each structure has different tax, legal and control implications, so take independent legal and tax advice.

The main risks

• Planning risk: if the site does not yet have permission, it may be refused or delayed.
• Construction risk: build costs can rise and programmes can slip.
• Sales risk: house prices and buyer demand can change between appraisal and completion.
• Finance risk: interest rates and loan terms can change, especially if refinancing is needed.
• Liquidity: your money is usually tied up until the scheme is sold or refinanced, often two to three years or more. There is rarely a way to exit early.
• Counterparty risk: you depend on the developer and contractor delivering.

Questions to ask a developer

• How much of your own capital is in this scheme?
• What is your track record on completed schemes of this size and type?
• Who is building it, and how is construction risk managed?
• What contingency is in the appraisal, and what assumptions sit behind the sales values?
• Where does my capital rank, and what happens if the scheme makes less than forecast?
• How and how often will you report to investors?
• What decisions need investor approval?

Pay particular attention to alignment. A developer who invests meaningful capital in the same scheme, on the same terms, has every reason to protect it.

Reading an appraisal

An appraisal shows the expected GDV, costs and profit. Treat it as a set of assumptions, not a promise. Test the sales values against recent local sales, check the build cost against the specification, and look at what happens to profit if values drop or costs rise by 5 to 10 per cent. A scheme that only works if everything goes to plan is a risky scheme.

Is co-investment right for you?

Co-investment in development tends to suit investors who understand property, can leave capital untouched for several years, and can afford to lose some or all of it. It is not a substitute for cash savings or a pension. Speak to a regulated financial adviser before deciding.

If you would like to understand how Kisiel Group approaches co-investment, including investing our own capital alongside partners, you can read more on our investor page.

Capital is at risk. Property development investments are illiquid and returns are not guaranteed. This article is general information, not financial advice.