Loans for commercial real estate and investment in the Industry viola-funding June 19, 2023

Loans for commercial real estate and investment in the Industry

commercial real estate projects financing
Loans and investments in real estate projects

The global size of real estate market in the past decades is estimated at $33.6 trillion, showing a compound annual growth rate of 6% annually after the end of the pandemic. The main share of loans and investments in commercial real estate projects falls on the global world, being an indicator of business activity and the general investment attractiveness of local economies.

Investments in the real estate projects are characterized by high cost, which requires developers to attract external funds.

Bank loans, issue of shares, project finance instruments and bonds remain the most important ways to finance commercial real estate investment projects around the world.

Loans and investment of commercial real estate projects; The basis

In a broad manner, commercial real estate is real estate related to running a business. These include, among others, office buildings, industrial properties, warehouses, shops, shopping centers, hotels and more. Investing in commercial real estate can bring great returns, but this sector is extremely sensitive to macroeconomic stresses, so financing such projects requires experience and caution.

To  invest in commercial real estate, the below ways must be viable:

1.Construction of commercial real estate facilities from scratch. This method requires a lot of time and effort, but under certain circumstances, it allows investors to save significantly in the long run. Moreover, construction opens up wide opportunities for the implementation of any ideas without significant engineering restrictions.

2.Purchase of ready-made premises with a signed contract and existing tenants. This is a very convenient option, as we do not waste time looking for a tenant. At this stage, it is already known whether the current business is profitable. The new owner only has to meet with the tenants to agree on further terms of the lease.

3.Purchase of empty premises for business and independent commercialization. In order to obtain satisfactory profits, firstly, the investor needs to choose a property with a good location, and secondly, it is necessary to quickly rent it out for a profitable business.

The approach to financing commercial real estate (CRE) directly depends on each company and the investment strategy adopted by it.

Self-financing large commercial real estate projects with a significant delay in return on investment is an overwhelming burden. Meanwhile, the scale of CRE projects is one of the main factors determining their high capital intensity and risk. The key issue, on which the effectiveness of the project largely depends, is the correct choice of the source of financing.

The most important factors for choosing a commercial property for investment:

•Technical parameters and quality of construction.
•Cost of maintenance and tax burden.
•Property location.
•Environment and infrastructure.
•Development prospects.

Financing of investments in commercial real estate

To access to these benefits is the high level of capital costs. The lack of internal financial resources, as well as the inability to use external sources of long-term capital, significantly limits the opportunities for many market players, potential investors in commercial real estate projects.

mostly, the problem of lack of financial resources becomes critical for the investor during the implementation of the project due to certain unforeseen circumstances. Such circumstances may be an increase in the development time of project documentation, additional social burden, rising prices for building materials, contractor services, and so on.

Viola Funding Limited offers large loans and investments for the financing of real estate projects, covering up to 90% of the project cost.

If you are considering a commercial real estate investment, please contact us.

Investments in the EU commercial real estate market

Information for the second quarter of 2022 published in Colliers’ latest EMEA Capital Markets Snapshot report shows that that the situation in Ukraine has strongly affected the European commercial real estate investment market, and it is currently quite difficult to predict the outcome.

The decrease in prices is due to the reduction of economic growth and stagnation in some regions, as well as changes in monetary policy and the lack of a clear vision regarding the end of the armed conflict near the borders of the European Union.

One of the important reasons for the constant interest of foreign capital in the European CRE market is the growing demand on the rental market, both for office and logistics facilities. Recently, developers are starting to invest less, but companies are planning many new projects and receiving many construction permits. In this way, they are preparing for the recovery of the economy, which indicates a restrained optimism.

Bank loans for the construction of  real estate projects

When a developer applies to a bank to obtain a loan, a standard procedure is applied, which involves evaluating the project and its business plan, assessing the financial health of a potential borrower, and conducting a range of marketing studies. The final stage is the meeting of the credit committee, which makes the final decision on the loan. Banks usually strictly control the project implementation process and compliance with the principle of targeted use of financial resources provided under the loan agreement, often interfering with current operations.

Bank loans today, remain one of the most important sources of debt financing, loans and investments for commercial real estate projects. In addition, any developer applying for a loan from a large bank must not only demonstrate high solvency and liquidity, but also provide financial statements drawn up strictly in accordance with international standards, audited by one of the leading international audit firms. However, collateral and guarantees remain the most important factors in bank decisions.

Issue of shares for financing commercial real estate

One of the most common ways to support investment in commercial real estate projects is to attract investors by issuing additional shares.

In essence, preferred shares are close to bonds and represent a fairly effective mechanism for generating financial resources without dispersing controlling stakes. But the legislation of some countries establishes certain restrictions on the use of this type of securities for safe investment in commercial real estate projects.

Project finance supports investment in CRE projects

In fact, this is targeted lending for the implementation of an investment project without recourse of the lender to the borrower, in which payment obligations are secured by future cash flows from the operation of the CRE project, as well as assets related to it. An important feature of project finance is the participation of the lender in the implementation of the project as a “portfolio investor” who does not have rights to property and is not a shareholder.

The main differences between PF and traditional bank lending are listed below:

•The large scale of the investment project.
•Long term financing (often up to 15-20 years and more).
•The lender takes on all the negative risks of the project.

At the same time, the nature of the projects does not have to be national in nature. Today, the use of project finance is widespread throughout the world in the construction of large facilities, not only for social, but also for commercial purposes.

Issue of bonds to finance development projects

A bond loan, according to the majority of CRE experts, is the most effective, and therefore a promising source of financing for projects in commercial real estate. The issue of bonds has a number of advantages over both the issue of shares and a bank loan.

For some developers, the issue of bonds may represent an opportunity to form a circle of potential borrowers who are loyal to the company and interested in financing its investment activities in general, without taking into account the specifics and details of a particular project. The first issue of bonds may not give the developer significant savings compared to obtaining a loan.

We are ready to offer you a collateral free loans and investments for construction of your real estate projects.

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