How financing challenges have come to define feasibility in construction
Demand for new residential and infrastructure developments is extremely high across the EU and UK, but financing challenges have become a defining factor for the feasibility of development.
The infrastructure problem behind finance feasibility in construction
Infrastructure development is often a long-term process, and capital can be locked away for years without seeing a profitable return. That is a feasibility problem for construction businesses – without timely returns, it is harder to convince funders to put their money into vital infrastructure projects.
Furthermore, we cannot build all the homes we need in the EU and UK without providing that infrastructure. Existing European Union infrastructure was largely built between the 1950s and 1980s and is approaching the end of its technical lifespan. More power and water are needed, but Alistair Green, global leader of McKinsey’s Infrastructure Special Initiative notes that what we call ‘infrastructure’ is changing, too.
He says: “For decades, this term referred mostly to traditional assets such as roads, bridges, ports, and power grids. Today, the definition of infrastructure is expanding to include tech-driven prerequisites for modern growth, such as hyperscale data centres, fibre networks, and electric vehicle charging stations.”
All of this infrastructure, old and new, shares certain characteristics which make it harder to secure financing:
Heavy up front expenditure
Long construction times
Complexity and higher risk
Potential for cost increases through construction period
Leveraging public funding can only take us so far
In many cases, public funding can fill the gap when profits are not immediately forthcoming. EU and UK governments have a key role to play because they are able to take longer-term risks. They can help finance bigger and more complex infrastructure and residential developments than private funders may be willing to.
However, public bodies cannot do it all. There are limits to the available public funding, and that leaves many residential and infrastructure projects looking for alternative sources of finance.
Data from McKinsey shows that private finance is ready to ‘meet the moment’, but concerns remain. The consultancy notes that, “while overall trends in fundraising and deployment are positive, potentially tougher conditions ahead are evident, particularly as holding periods lengthen and investors seek commensurate, risk-adjusted returns. The ability to drive value creation will become increasingly foundational.”1
There is also a political risk which affect large infrastructure and residential developments. These can be another concern for private financers. David Keniry, an advisor for private and public sector developments across the EU and the USA, said: “Projects are susceptible to political change no matter how strong the political support is perceived to be or what stage a project is at.
“Bidding for a project is expensive, and if a project is cancelled abruptly it will damage confidence in a market that will make it harder to attract competitive bids in future. The reality is decisions about infrastructure are at the heart of politics.”
How to secure reliable financing to make infrastructure and residential developments more feasibly
In that context, it is not surprising that so many developers in the EU and UK are finding it difficult to secure private financing. Financing has, therefore, become a serious feasibility problem for infrastructure and residential developments as a consequence.
However, there are ways to reduce that feasibility risk and make your infrastructure and residential projects more attractive prospects for financers.
Our e-book Housing and Infrastructure Under Pressure explores:
How financing impacts feasibility
Why projects struggle to secure funding
Which approaches help make projects more attractive to investors
Download the e-book to explore the full insights and practical approaches.