Over the years the real estate development environment has transformed significantly. Previously real estate developers had multiple avenues to finance the development which included their equity, raising debt and off-plan sales. Over the past few years and more recently because of the pandemic, raising debt on construction projects has become very difficult and off-plan sales have moved more towards post construction payment plans resulting in higher equity demands on the developer.
This shift in the development landscape has resulted in many private developments being stalled or stopped as these private developers are unable to secure funding for their projects. Many developments from a project standpoint are sound and would attract investors and end-users if completed. The gap of financing the project is lacking and requires attention.
A few alternatives that have been explored and have gained traction include; crowd funding, fractional ownership and buyback options. To further explain each, crowd funding as a concept is one wherein multiple individuals or institutions commit to proportion of funds to a particular project. The subscribers to the crowd fund would be provided with a feasibility of the project and would be entitled to the profit of the project after all expenses. The crowd funding platform is administered by a licensed entity and only when the total funds for a project are raised, are these then placed into the project. If sufficient funds are not raised then the subscribers to the fund are refunded their investment. This form of investment permits for smaller amounts to be raised from individuals who may not have the funds to commit for a unit in the development and yet provides a return on investment.
Fractional ownership, as it is named, provides partial ownership in a real estate asset that has a registered title. This may be shared on a time basis wherein each owner may have the right to the property at different times of the year or the fractional owner would be entitled to a fraction of the profit that the property would generate from the income that it would generate. Like crowd funding, it provides for individuals to partake in property investments in smaller tokens.
Guaranteed buy-back option
One other option that has been gaining traction in the recent months is a guaranteed buy-back option. In this option, the developer may provide an investor a guaranteed return on his investment which would normally be greater than the investor would achieve in the traditional purchase and resale of a real estate asset. In this option the developer would have to forgo significant profits but in return would be able to ensure that the development that the developer was building would see completion.
Global Management Consultancy has affiliated itself with crowd funding platforms and also has been successful in formulating buy back options for some developers. The real estate sector in the last few months has seen transactions increase in the last few months and certain areas have seen an upward trend. It would therefore be wise for developers of stalled projects to think laterally and work out mechanisms to restart their projects.
- The author is the CEO of Global Management Consultancy