The matter of money – what to keep in mind when financing a real estate development
“Investing in real estate always pays off!”: a phrase often heard in Switzerland, but unfortunately untrue. Real estate projects are frequently expensive and complex to finance. Real estate development is not a financial black box, but it is considerably more complex than buying an existing property.
What is decisive is asking the relevant questions about construction financing early on – whether to yourself, a bank or other partners. The project must be planned so that it remains financeable over the long term and even in headwinds. Most real estate developments fail not during construction, but because of overly optimistic assumptions or missing financial buffers and reserves.
Anyone who prepares the financing properly meets potential partners on an equal footing. Anyone who knows the most important financial levers can finance a real estate development very pragmatically and efficiently – even as a private individual.
Profitability and risk
The amount and structure of construction financing depend, among other things, on the interest rate, equity requirements and collateral. This calls for a clear overview and a comparison of costs, returns and reserves, without «sugar-coating the figures».
Particularly important: favour conservative scenarios, identify clear risk drivers (costs, time, marketing) and keep a plan B up your sleeve in case the underlying conditions change.
The checklist:
- Realistic assumptions: future rents or sale prices are validated against comparable values from the micro-location.
- Completeness of information: construction costs including planning; fees, charges, site development, marketing and financing costs are taken into account.
- Reserve factored in: to integrate renovations or conversions into your planning, calculate the funds required for them. Unforeseen events and price/market leeway are not «optimised away».
- Stress test carried out: for example +10% costs / +3–6 months time / lower proceeds – the project remains viable.
- Plan B defined: what changes if the market/costs/timing tip over (standard, phasing, use, exit)?
Financing and liquidity
A good financing plan for real estate covers more than interest rates and mortgages. It describes the mix of equity and debt, the logic of disbursements (tranches), collateral, milestones and reporting. What is decisive is the liquidity immediately available during the works. A project can be profitable on paper and still fail if invoices fall due earlier than cash inflows arrive.
The checklist:
- Equity and debt logic clarified, collateral and conditions known in detail: this clarity helps you find the best financing options.
- How much money is really available freely – and when is it needed?
- Cash flow plan in place: what falls due and when (planning, fees, construction, variations)? Are construction progress and disbursement dates synchronised?
- Time buffer factored in: delays are expensive – and explicitly budgeted for.
- Real liquidity buffers: the reserve is available (not «tied up» or only theoretical).
- Worst-case gap examined: what happens if the disbursement comes later or the variation has to be paid immediately?
Project effort and complexity
Complexity is a cost driver – indirect, but noticeable. Follow-up financing is particularly important for long-term developments. A personal conversation with the bank or another (financing) partner is also essential. More interfaces and an increased need for coordination can make project execution more expensive. Anyone who prices in complexity early and defines roles clearly reduces costly surprises.
The checklist:
- Roles and responsibilities are clear: who decides what, who controls costs, who manages schedule/quality?
- Cost controlling is set up: budget, approval processes, variation management, reporting cadence.
- Minimised interfaces: communication and decision-making channels to all parties involved (planners, authorities, etc.) are defined.
Market and demand trends
There is no single Swiss real estate market. The micro-location, the «product» suited to that location, and the timing are what matter. What counts above all, therefore, is what can realistically be rented or sold at a specific location. And how robust demand remains when interest rates, supply or competition change.
The checklist:
- Target group defined: who is the product for – and why does it fit here?
- Competition checked: new-build pipeline/supply in the area, differentiation, price ranges.
- Marketing strategy in place: first letting/sale, timing, channel, responsible parties, budget.
- Robustness examined: does demand hold even in a slightly changed interest rate/price environment?
Always think and plan in alternatives
A resilient model consists of a base scenario, a stress test and a detailed plan B. Secure your investments with a loan or a loan commitment and plan any conversions conscientiously. This structured approach provides security and confidence for a possible construction and real estate financing.
Profitable and financeable – if you understand the decisive financial factors
Developing the hidden potential of real estate can be a very solid investment. However, only if the financing is not the «final step» but an integral part of the project idea and its implementation. Anyone who carefully calculates all factors – such as costs, risk, the monthly construction-financing instalment and the interest rate – quickly realises: real estate pays off when all financial factors hold up even in headwinds.