As the UK heads into the 2025 Budget, a paradox confronts the residential development funding sector: while debt markets are “ready and willing,” equity remains scarce. This “equity gap” is becoming frustratingly persistent and is evident from London’s major regeneration zones to regional growth hotspots. It is fundamentally reshaping how deals are originated, structured, and delivered — or, as evidenced by the declining UK housing start numbers, not.
The Liquidity Challenge
Our recent placement processes confirm robust debt market liquidity for residential projects. Oversubscription and intense competition among lenders have fostered borrower-friendly terms. Non-bank lenders are hungry, traditional banks are strategically expanding their property lending, and margins have moved in the right way. Helpfully, the lively debt environment presents significant opportunities for developers to secure senior funding with creative structures and terms.
Indeed, regulators are now publicly voicing concerns on the private credit (debt) markets. Even the banks themselves are starting to make negative noises about the level of liquidity.
UK real estate investment has continued to pivot away from equity strategies into debt – they are understandably interested to deploy but it now feels a little late to the party. Firstly, increased credit investment regulation feels inevitable, and critically, credible deployment strategies are lacking. After all, there is no need for debt without equity sitting above it.
What’s Behind the Squeeze on Equity?
As ever, multiple factors.
Fund Raising Challenges: After a difficult few years, many equity funds are holding legacy positions, experiencing slow fundraising cycles. Exit delays and capital return issues have made funds more cautious, with a focus on outperforming against market norms to regain investor confidence.
Macroeconomic backdrop remains challenging: Despite favourable supply-demand fundamentals for housing, regulatory uncertainty, increasing taxes, stagnant wages, and rising unemployment all add time and risk to development projects. These factors make other sectors and geographies more attractive for investment.
Risk Adjusted Returns: As outlined above, from a risk perspective, real estate debt currently offers attractive yields with lower risk (if it can be deployed). This reduces the incentive for investors to move ‘up the risk curve’ into equity. Additionally, compared to ground up development, other viable opportunities – conversion, or repositioning – are competing for investor attention, often at similar returns and/or lower risk profiles.
Consequently, residential development return expectations have risen – value-add investors now seek c20%, with opportunistic investors targeting c25-30%. While private capital has stepped in to fill some gaps, its deployment remains highly selective, underscoring the need for innovative capital solutions to sustain residential development viability. There is moreover a stark gap emerging between what private capital is seeking in its return for a development project and what the UK planning and specifically London viability testing procedure is willing to accept. This is leading to capital flight to other geographies across Europe where profit manipulation is not prevalent.
How Can the Pipeline Be Unlocked?
Resolving the equity pipeline bottleneck requires comprehensive solutions beyond mere policy announcements:
- Policy Certainty and Planning Reform: The sector repeatedly calls for clearer, more efficient planning frameworks, including streamlined consent processes and transparent and simpler policies on development levies and affordable housing obligations. Viability testing of development projects is causing significant problems and barriers to capital investment. From a regulatory perspective the positive signals from the Building Safety Regulator are encouraging, yet further progress is essential to ensure tangible value to both consumers and developers.
- Additional liquidity and creativity in Mezz/Pref Capital Tranches. We anticipate increased participation of debt funds and private equity in mezzanine and preferred equity positions through 2026. Undeployed capital impairs fund performance, making it likely that investor appetite shifts beyond senior debt to activate this capital.
- Public/Private Partnerships. Using guarantees, co-investment, or subordinated debt – could help re-align incentives and lower equity hurdles. Devolved local authorities and Homes England have some interesting initiatives although the pace of deployment and their market fit are undoubtedly in question. The GLA’s £322m investment fund represents a possible (but modest) catalyst for schemes to be delivered in this parliament, if it’s mandate supports equity investment…. and we continue to engage closely with the GLA as its investment policies develop in this regard.
Conclusion
The equity gap will not close through policy or market action alone. It requires genuine collaboration among public bodies, investors, developers, and advisors to innovate capital structures, share risks more effectively, and realign incentives.
With reforms underway and investor appetite shifting, the next 12 to 18 months could be pivotal. The November 2025 Budget offers a vital opportunity to set these reforms in motion. Crucially, public funding should focus on collaborative equity investments – enabling investment recovery and profitability – rather than solely on senior debt or grants. Unlocking this capital is essential for delivering the sustainable, residential-led development that the UK urgently needs.
Laurie Marsh is founder of TRST, a capital advisory partner to developers and investors in the UK’s real estate markets.
