Case study:

Real Estate

This article describes the financing mechanism for real-estate projects or existing real estate schemes.

 

Rationale

Real-estate financing can take many forms. Over the last few years, securitisation has become an interesting alternative to more traditional forms of financing, such as bank loans and debt issuance. Securitisation transfers the risk to the investors and effectively removes part or all of the risk from the promoter and/or credit institution.

Investors may be interested in the opportunity of buying this risk for the following reasons:

  • The risk is usually associated with an established project or real-estate scheme. As such, qualified and institutional investors have reasonable means in place to evaluate the risk associated with the securitisation vehicle.
  • The promoter usually has to pay a higher coupon to remunerate potential investors and the risk/return trade-off for investors can prove interesting in a low interest environment.

 

Examples of Real-estate securitisation:

  • Project financing: The securitisation vehicle issues securities (debt instruments or certificates) and uses the proceeds of such issuance to invest in a specific development project with the objective of selling this project in the relatively near future (usually within three years). The securitisation vehicle will receive the proceeds of the sale of the project over the coming three years or upon completion, and will pay an income to the security holders either based on fixed interest or variable interest or a combination of both.
  • Real-estate financing: Existing real estate can be bought or refinanced using securitisation vehicles. This is usually done in order to replace bank financing if  existing credit lines are needed for new projects. The proceeds generated from rental payments generates the income stream for investors. Again the relatively stable coupon associated with this type of financing can be attractive to investors.
  • Private Real-Estate: Private investors can transfer their investments by using a securitisation vehicle. The profit realised upon disposal of  real estate can be utilised to develop or buy more property. By using the securitisation vehicle similar to a fund, private investors are able to share the risk and potential returns associated with the target project. This allows investors to reduce their risk on a single project and spread the risk between them.

 

Functioning

Private real estate ownership, or financing for a family, typically takes the form of a real-estate securitisation fund in which family members own part of the real-estate portfolio through ownership of fund units or debt securities. These units can capitalise the income or pay-out dividends/interests. Institutions typically issue debt instruments from their securitisation vehicle to attract investors and pay a fixed or variable coupon.

The securitisation vehicle can either buy the asset, or securitise only the risk associated with the development or rental income of the real estate properties.

 

 

 

 

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