In the evolving landscape of UK real estate finance, preferred equity has emerged as a pivotal instrument for bridging funding gaps in property development and investment projects. Positioned between senior debt and common equity in the capital stack, it offers a hybrid solution that balances risk and return for both developers and investors.
Preferred equity is a form of capital that grants investors preferential treatment over common equity holders with regard to returns and claim hierarchy. Unlike traditional debt, it usually doesn’t involve fixed repayment schedules, but instead provides fixed or variable preferred returns—typically ranging between 10–20%.
In the event of liquidation, preferred equity holders are repaid after debt but before common equity, offering a lower-risk profile than common shares.
As explained by EquityMultiple, preferred equity plays a crucial middle-ground role in real estate capital structures.
Priority Returns: Investors receive distributions before common equity holders.
Subordination to Debt: Though not as secure as senior debt, preferred equity is higher in priority than standard equity.
Flexible Structuring: Terms can include fixed returns, profit participation, and covenants.
Conditional Control Rights: Investors may be granted veto power over key project decisions, especially in underperformance scenarios.
Further detail is provided by Katten, which notes its increasing use as an alternative to mezzanine debt.
Preferred equity is especially relevant when traditional finance is insufficient or undesirable. It’s commonly used for:
Property Development: To fund construction or major refurbishments.
Acquisition Funding: To close capital gaps not covered by senior loans.
Recapitalisation: As part of capital stack restructuring in maturing assets.
According to Finbri, preferred equity is gaining popularity for its versatility and non-dilutive structure.
For Developers:
Gain access to funding without increasing debt load.
Retain greater project ownership and decision-making power.
For Investors:
Enjoy higher, priority-based returns.
Benefit from structural protections such as equity covenants and preferred distribution.
CaliberCo notes that preferred equity offers an appealing balance between risk and return, especially in a market with rising interest rates.
Fraser Bond provides tailored preferred equity solutions to property developers and investors across the UK. Our approach includes:
Capital Stack Structuring: Designing optimal equity and debt combinations to meet financial goals.
Investor Matching: Connecting clients with vetted preferred equity partners, from private funds to institutions.
Strategic Advisory: Guiding term sheet negotiation, return structuring, and exit planning.
As highlighted by Property Finance Partners, preferred equity plays an essential role in flexible property finance.
Preferred equity is a powerful financing tool that serves both risk-conscious investors and growth-focused developers. Its hybrid nature offers the predictability of debt with the upside potential of equity—making it an increasingly popular component in UK real estate deals.
To explore how Fraser Bond can structure a preferred equity solution for your next project, contact our team today.
