There are many financing options for residential property construction. In addition to self-financing, developers can choose to finance with a long-term bank loans or equity financing, as well as complex project finance tools using SPVs. The global Project finance for residential property construction market exceeded USD 4 trillion in 2017, showing a CAGR of about 10% during the pandemic.
Now, as the forecasts of the global economy improve, we see an increase in investments in BTR and BTS construction, and developers are striving to implement flexible projects in the field of residential construction using project finance.
Government policy and social necessity, balanced by competition for financial resources, dynamically changing demand for apartments, together form a complex and contradictory market for modern housing construction, unique for every region of the world.
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The global residential construction market exceeded USD 4 trillion in 2017, showing a CAGR of about 10% during the pandemic.
Project finance for residential property in many countries develops in different ways, counting from non-repayable financing and budgets.
Sources of financing for residential property construction project
Any investment projects in residential property construction require significant capital investments. Consequently, the initial condition necessary for investment is the availability of large free capital.
The way of investing capital and the potential for its increase depend, first of all, on the financial resources of the investor.
These investors can be large companies, banks, credit communities, pension funds, venture capital funds, wealthy private investors or government customers. The methods of participation and approaches to evaluating investment projects for these investors differ significantly.
The most common sources of Project finance for residential property construction and purchase of real estate income and proceeds from the sale of other assets.
By its nature, real estate can be called a capital-intensive investment object that requires the use of external sources of financing, mainly bank loans. Activities related to both the acquisition and maintenance of real estate require significant financial resources from the company.
Viola funding Limited offers Project finance for residential property, and as well as loans for the construction and renovation of real estate.
Importance of property construction project financing
Project finance is based on a number of unique features. The object of financing in each case is a separate investment project (usually a new project), the financing of which is organized by an independent legal entity, a special purpose vehicle SPV / SPE.
Lenders do not have full access to sponsors’ assets or have limited access. Unlike corporate finance, the source of debt repayment for SPV is the projected cash flows of the investment project and, ultimately, the assets of the project.
Benefits of project finance for developers: The ubiquitous use of project finance to finance the construction of residential real estate.
Since LTV (Loan to Value) can easily exceed 90%, project finance is ideal for young companies that do not have sufficient assets or free funds to implement a large construction projects. It is also a suitable option for companies that are simultaneously implementing several capital intensive projects in tough market conditions.
Another advantage of the project finance method is the lack of sponsor liability for the SPV’s debt obligations (except for the provision of a guarantee). The borrowed funds are provided against future financial flows, regardless of the assets of the borrowers.
Another advantage of this method for companies with no experience in the market is the ability to attract significant financial resources for the construction of an apartment building or other real estate for rent. The latter is a common requirement for classic corporate loans. It should also be emphasized that the possible bankruptcy of SPV does not have any catastrophic consequences for the developer.
To consider the benefits of project finance for residential property in the context of tax optimization for the project company and sponsors.
Despite the many advantages, the use of this financing method has some disadvantages.
Important requirements for organization of financing
In order to ensure the attraction of sufficient financial resources for the construction of a residential complex, the project participants will have to fulfill a number of requirements regarding the investment object, financial indicators, legal security of the upcoming transaction and other important aspects.
The capital provider will carefully analyze the project as it takes on some of the risks.
The bank needs to check the rental agreement in the context of the possibility of reducing rental rates and assess the risk of early termination of the lease. The bank will also check the level of vacant space in the area for rent, the minimum OPEX ratio (operating expenses) and minimum CAPEX (capital expenses) for this class of properties, as well as analyze the potential for tax optimization.
Project finance for residential property is generally associated by higher bank profits with high risk. It is also costly and time-consuming.
Global practice of using project finance in residential construction
For example, in the United States in 2016-2017, Build-to-Rent construction showed an increase of 6.5%, which is the best indicator in the previous decade and a half. The UK market has also been quite successful with a 4x increase in the number of completed BTR projects between 2016-2021. Despite the market slowdown as a result of the pandemic, this concept has a promising future.
The construction of housing for rent (BTR market) in Europe and the United States is developing rapidly for several reasons.
This is facilitated by demographic changes, a free lifestyle with very frequent movements and a high level of income, however, insufficient for buying a home.
Despite the growing need for rental housing, most companies today focus on the construction of residential properties for sale. In many countries, developers are hesitant to undertake investment projects related to the construction of apartment buildings for rent using project finance, despite unmet demand.
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