Your One-Stop Funding Solution for Real Estate and Corporates
December 09, 2020
For the investment in real estate and corporates, a massive amount of initial capital outlay is required which can be obtained from various sources. It is often challenging to obtain funding solutions for hefty scale investments in real estate, and most of the corporates may not be able to finance them only from personal savings. Hence the necessity for additional sources of finance such as equity or self-financing, commercial banks, merchant banks, insurance companies, mortgage institutions, etc arises.
Sources of Real Estate and Corporate Funding
More frequently, investors borrow from banks or other institutional lenders a substantial portion of real estate costs. The debt is secured by a mortgage creating a claim against the property. In some cases, the real estate may be acquired subject to existing debt, existing debt may be assumed in connection with the acquisition, or the seller may be willing to take back a lien position to secure a portion of the purchase price for repayment of existing financing. The funding solutions available for financing for corporates and real estate are classified into two categories, i.e., conventional and modern sources. In the conventional type of financing, the lender uses the property being purchased as security for the loan being offered. These finances can be advanced from the following sources;
- Commercial Banks: Commercial banks are one of the most common funding solutions for real estate and corporate financing. They act as lenders for different loans. For permanent residential purchases, financing is occasionally provided by commercial banks. A primary real estate activity includes short-term loans, particularly construction loans, usually of a duration ranging from six months to three years. In the developed market some of the largest commercial banks are also directly involved in real estate financing through their trust departments, mortgage banking operations, and real estate investment trusts.
- In India also the concept of real estate investment trust (REITs) has emerged as one of the sources of financing of real estate. Further special funds have been created operated through State Bank of India to support stressed projects under this sector. In the international market, there are other major sources available which in the long run may be adapted in the Indian market also as the sector matures. The details are as under:
- Insurance companies: These companies play an essential role as providers of capital for real estate and corporates from an equity standpoint. They typically do their lending through local correspondents. In real estate and corporate investments, this means long-term commercial and industrial financing.
- Pension Funds: Another common funding solution for corporates and real estate investment is the pension funds. Earlier, these funds were used for investment in the stock market and bonds, but pension funds in the modern world have opened doors for investment in other places. Besides these, one can also go for unconventional funding solutions to obtain financing for real estates, such as peer-to-peer lending, venture capital-backed funding loans, hedge funds, etc.
- Convertible loans: Using convertible loans as a funding solution for corporates, companies finance their investments or projects by giving debt at favourable interest rates. The convertible loan has a warranty that gives the debt holder the option to exchange all or a portion of the loan principal for an equity position in the company at a predetermined conversion rate within a specified period. Convertible loans are used by companies seeking more favourable lending terms in which the lenders may give up interest-earning opportunities for a potential stake in the company.
- Commercial papers: Commercial papers as a funding solution refer to short-term security issued directly to investors to raise funds for a period of up to a year. It was also introduced in the year 1990 in India and is used by large property companies having high ratings. These companies use it for development funding. Large banks issue them, so that short duration financial obligations are fulfilled. From the date of the issue, these commercial papers have matured from a minimum of seven days to a year. The CP’s are issued in the denominations of 5 lakhs or its multiples.
An increase in the financing options has been observed to meet the increasing demands of corporate and real estate. When a corporation goes for new investment, it can also use cash flows from other running projects to fund the new project. The credit rating can also help to acquire money and fund a new project. In a real estate project finance, equity used to fund the project is usually paid back at the end of the period. Hence based on your requirement, you can choose the perfect funding solutions in order to support your company.