The capital stack is not a fixed concept — it is a dynamic instrument that needs to be calibrated to the specific risk profile of each development project. In the current environment, getting this calibration right has become the single most important determinant of whether a project is financeable at all.

The Pressure Points

Construction costs across Western Europe have increased by 25-40% since 2020, depending on the market and asset type. At the same time, the interest rate environment — while easing from its 2023 peak — remains materially higher than the decade-long period of cheap capital that preceded it.

The result is a significant compression in developer margins, which in turn has created pressure on two fronts: lenders have become more selective, and equity investors have raised their return hurdles.

For developers, the implication is clear: the capital stack must work harder than it used to.

Senior Debt: The Foundation

Senior development finance typically covers 60-65% of Gross Development Value (GDV) and 85-90% of construction costs, depending on the lender and the asset class.

In the current market, we are seeing senior lenders focus on three things above all else: the quality of the contractor, the credibility of the development appraisal, and the track record of the developer.

The relationship between a developer and their monitoring surveyor has also become more important. Lenders want to see a monitoring process that they trust, not one that is viewed as an adversarial compliance exercise.

Mezzanine and Stretch Senior

The gap between what senior debt will fund and what a developer needs to make a project work is increasingly filled by either stretch senior or mezzanine debt.

Stretch senior — where a single lender provides up to 80-85% LTC in a single facility — is often simpler to execute but comes at a higher blended cost. Mezzanine, provided by a separate lender sitting behind the senior, is more complex to coordinate but can sometimes achieve a better overall cost of funds.

The decision between the two depends on the project timeline, the appetite for intercreditor complexity, and the specific terms available from the market at the time of structuring.

Equity: The Critical Layer

No capital stack works without the right equity foundation. In the current environment, we are seeing more developers explore preferred equity and joint venture structures as an alternative to deploying all of their own capital.

A well-structured equity partnership can reduce a developer's capital exposure, align incentives through a promote structure, and — importantly — provide a credibility signal to senior lenders who view strong equity partners as a risk mitigant.

The key is alignment. Equity partners who have an operating understanding of development risk make better partners than those who approach it purely as a yield play.

Our Perspective

We approach development finance mandates with a whole-stack perspective. Our role is not simply to find a senior lender — it is to help structure a capital stack that is coherent, competitive and aligned with the specific risk profile and return objectives of the project.

If you are in the early stages of planning a development and want to stress-test your capital assumptions before you are committed to a site purchase, we would encourage you to get in touch early in the process.