Real estate is a capital-intensive industry, and to complete each project, one must deal with the process of funding that will allow the developer to start the project. While starting the construction of a real estate project, a developer goes for securing debt or working capital tranches that will give a headstart to the project.
Now, to receive funding for each project, a company needs to take debt from the bank, where it keeps the real estate assets as a mortgage, or give the bank some of the preferred shares of the project so that for each new project, the flow of working capital remains intact for the builders.
In this blog, we will discuss some of the funding methods that real estate companies are using to complete each project in the industry.
Different Methods to Raise Funding for Real Estate Projects
In India, real estate is a booming sector, and both in the luxury space and also at affordable housing, the growth is still there and that pushes developers to look for more markets to build projects.
A loan agency plays a key role when it has expertise in a particular department, and that helps the lenders provide loans to those builders that have a reputation in the market. Different methods are there for a company to raise funds here are some of the lists that are preferably chosen by some of the companies.
- Following Debt Financing Methods
Debt financing is one of the old concepts where the developer takes the entire risk of making the project happen and then pays it back to the lender at a specific interest. However, it’s a capital-heavy business, and there is a limit to which a company can raise debt. Therefore a company reaches a ceiling in that position.
In the growth market, a realtor always wants to start multiple projects at a time as it gives them the time and space to capture the demand of the market. Here comes the need for high capital that will finally give them the leverage to take market opportunity. In debt, therefore, it’s quite impossible to capture.
- Funding Through Debentures
The next method of funding is through the use of convertible debentures and that helps a developer to start the project. A company that can’t afford to keep high debt on the balance sheet chooses the ay for promoting debentures to the banks as it allows them to convert that into stocks when it’s necessary.
If a company raises debt through debentures, it reduces its risks. It also allows the bank to have better control over the entity and to trail the money being used for the project.
- Raising capital from a Private Equity
The next aspect is to raise capital from private equity, and for that, one needs to look into the options where an investor will follow the guidelines of the realtor and will find prospects in their venture.
This type of funding is required, especially for companies securing funding and are in the turnaround part of the venture. Raising capital through a private equity firm curbs the autonomy of the business. Still, a prominent PE firm can provide financial leverage that can become helpful for the business and later create shareholders’ wealth.
- Partnering With Another Brand for a Project
A joint venture is also a type of deal through which projects are developed. It’s the process when a realtor develops a property for a particular brand or company. If a hotel wants to make a greenfield investment, it needs to tie up with a realtor, and both entities can finance that project.
There is a DSA app in India that allows small realtors to get in touch with the lender, and there, they can keep the shares pledged to raise funds and start a project. A hotel or a retail store can get in touch with a realtor to finance a particular project,
- Taking the Foreign Direct Investment Route
Finally, the FDI is another source through which the builders can raise funds and that will help the realtor to complete projects faster as they are the ones who are privately lending capital to these companies.
These are some of the prominent sources for a developer to fund a real estate project in multiple areas in a quick frequency.
