Forward funding vs forward purchase

Forward funding and forward purchase both pre-agree an institutional exit before a scheme is complete, but they allocate the construction phase very differently. In a forward funding the investor buys the site at golden brick and funds the build in staged drawdowns. In a forward purchase the developer funds the build and the investor pays only on practical completion. The choice between them is one of the most consequential decisions on any income-led development, and it turns on who should carry the construction cash flow and the risk that goes with it.

This page sets the two structures side by side. For the full treatment of each, read the anchor guide to forward funding and the forward purchase explainer.

The core difference in one line

Forward funding has the investor fund construction from golden brick and take development risk early; forward purchase has the developer fund construction and the investor pay a fixed or formula price only on completion. Everything else, the pricing, the legal documents and the risk allocation, follows from that single distinction.

Side by side

The two structures diverge on funding, timing, risk and price, and the table below captures the practical differences a developer weighs at heads of terms.

Dimension	Forward funding	Forward purchase
Who funds construction	Investor, in monthly drawdowns	Developer, usually with senior debt
When title passes	Golden brick	Practical completion
When investor commits capital	Early, at golden brick	Late, on completion
Construction interest cost	Avoided	Borne by developer
Development risk to investor	Higher	Lower
Yield to investor	Keener	Softer
Profit retained by developer	Lower, funder takes a return	Higher
Refinancing risk	Removed	Retained by developer
Typical developer profile	Values certainty over margin	Well capitalised, keeps upside

How the pricing differs

The investor accepts a keener yield on a forward purchase and demands a higher yield on a forward funding, because yield follows risk. On the same asset the forward funding yield typically sits some 25 to 75 basis points above the forward purchase yield, reflecting the development and letting risk the funder takes on by committing early and funding the build.

For the developer the calculation is the mirror image. Forward funding removes the interest cost of construction and the risk of having to refinance in an uncertain market, but the funder prices a development return into the deal that caps the developer’s profit and exposes it to profit erosion if costs run over. Forward purchase preserves more of the upside and keeps control of the build, but the developer funds construction, pays the interest, and carries the risk that the asset is not delivered to the required standard by the longstop date.

How to choose

The right structure is the one that matches the developer’s balance sheet and risk appetite to the scheme’s income profile, and there is no universally correct answer. A short decision framework helps.

Choose forward funding when certainty of exit and removal of construction and refinancing risk are worth more than the last increment of profit, when the scheme is clearly institutional, and when the developer would rather not carry the build on its own balance sheet. Choose forward purchase when the developer is well capitalised, can fund construction on sensible terms, wants to retain more of the margin, and is confident of delivering to specification and on time. Many developers test both in the market before committing, because investor appetite and the yield gap on a specific asset are only knowable by asking.

The analysis also shifts by sector. In logistics and PBSA, where development finance is readily available and investor demand is deep, forward purchase is common. In capital-intensive or operationally complex sectors such as data centres and later living, the funder’s balance sheet and early commitment often make forward funding the more practical route. If you are weighing the two on a live scheme, set out the numbers and we will model both structures against your objectives.