Getting funds for a Real Estate Project is crucial to maintain the project cashflows for a smooth construction process for timely delivery of the project & to save on cost from inflation. Real Estate projects have huge project costs & require a regular inflow of funds to maintain construction work as sales figures are directly associated with construction levels. Promoter equity, sales receivables, and external/bank loans or investments contribute to the cash flow structure of a project.
As promoter equity contribution is limited and sales receivables are affected due to sluggish market conditions so a project cashflow largely depends upon external loans or investments. But, these days, raising a loan or investment for a construction project is very challenging due to the lack of interest in the real estate sector by conventional banks & nbfc’s. So now we learn, what are the funding options and how we can raise funds for real estate projects.
How to Get Funding for a Real Estate Project?
1. Debt Finance
Debt Finance is one of the most popular and widely used forms of financing in India and is ideal for raising small amounts of funds to larger amounts. In India banks as well as non-banking finance companies are active in financing various sectors but banks specifically shows a lack of interest in real estate sectors Still a lot of NBFCs offers loan for real estate developers. So raising debt finance through NBFCs is one of the best options for real estate developers as these companies have faster approval rates and better customer service.
2. Real Estate Funds
Real Estate Funds are specifically allotted for the real estate sector and designed as per the current real estate market conditions, proving one of the most dominant sources of funding for real estate projects in India. Currently, there are lots of Real Estate Funds active in the Indian finance market.
- These funds invest in real estate companies in the form of Non-Convertible Debentures(NCDs) for developing a project or property. Features offered by real estate funds through NCDs make it the best option for raising funds for real estate projects.
- These funds provide loans for purchasing vacant lands to constructing of projects. As a general rule, borrowers must contribute 30% of the total cost, while the remaining 70% can be financed
3. Private Equity
Private equity investment could be an option, but it is beneficial at the early stages of the project to rule out worries about giving fixed monthly returns to investors. So, more cash flows will be available for the development of the project. Private equity investment requires the dilution of company equity & equity investors hold the stakes of the company towards its investment. Raising funds through this tool could be a time-consuming process but offers a comfortable and company-friendly repayment plan.
4. Joint-Venture(JV)
A lot of real estate investment companies are interested in joint-venture with distinguished builders & developers who are developing projects in sound locations that promise high returns on investments. If the developer has delivered a number of projects and has a good track record without litigation, he can look for a joint venture partner for their upcoming projects. The project profit is divided between joint-venture partners as per the agreement & conditions pre-decided between the parties. Similarly, the roles of both partners will be decided before the investment will be made & development of the asset.
5. Foreign Direct Investment(FDI)
Foreign Direct Investment(FDI) in real estate will be an excellent tool to raise a large amount of money at very low-interest rates compared with the Indian market rates. It generally ranges from a minimum of fifty to hundreds of crores to larger amounts.
Conclusion(Funding Real Estate Projects):
In my opinion, if you are a new developer then you can opt for debt financing as it is available through some NBFCs available in your local market & they have multiple programs to fund, and, if you are medium range developer who delivered some projects earlier, then you must opt for the real estate funds as they are in the rise in the market & launched as per current market conditions to serve in a better way.
If you are a medium to large developer with a sizable market share then Private equity, Joint-Venture, and FDI will be suitable for you, subject to the project type and availability of investment tools. And, if you are a highly creditable developer looking for a large amount of finance at lower interest rates then FDI is definitely for you.
Contact us, to help you choose & raise the right type of investment tool for you.
