FINANCE

Property Finance | Key Consideration for Real Estate Projects

Real Estate Finance – Art or Science ?

Keypoints:

Understand the underlying asset / project |Use a common sense approach to projections | Real Estate Finance needs to be Structured Finance

The Basics

• The real estate markets worldwide attempt to “mystify” this asset class, insisting that property is an art rather than a science.
• As the widest owned asset class in the world, many decisions to buy and sell properties are governed by the heart rather than the head
• This leads to anomalies in market information and asset valuations.
• Also, property is an illiquid asset class, with transactions in being hampered by lengthy and complex legal processes and high transfer costs
• From a banking perspective, Real Estate is simply another cash flow generating asset finance class, with revenues generated through the leasing, sale or operation of the underlying asset.
• As financing focus underlying asset (or project) professionals, we on analysing the and provide reasoned projections on the sustainable future cash flows to be derived out of theproperty for the duration of our proposed loan.
• We also focus on having a clear idea on how any residual debt at the end of our facility can be re paid or refinanced and understand the risks associated with these assumptions.
• Real Estate is not necessarily complicated,

– but each underlying project needs to be analysed carefully (the “art”) and

– financing solutions need to be put together in a structured manner (the “science”) in order to mitigate the common risks that arise from projects.

• Discrete Projects
• Build to Sell Project
• Residential
• Fractional Offices or full offices
• Semi formal retail

–        Leasing Projects

• Retail
• Offices
• Industrial
• Residential
• Hospitality Projects
• Refinance Projects
• Equity Release financing
• Balance Sheet lending to development companies
• Lending to REITs and Listed Companies and Property funds

Securitization

 INTRODUCTION TO SECURITIZATION

• Securitization involves issuing securities backed by a segregated pool of revenue producing assets.
• The most common type of asset securitized is a residential mortgage (Residential Mortgage Backed Securities-RMBS)
• The diagram below displays the structure of a generic securitization.
• The Bank sells the assets to a Special Purpose Vehicle (SPV), which issues bonds or notes to investors to pay for the assets bought from the originator.
• Investors receive interest and return of principal.
• The originator receives a servicing fee for managing the assets and cash flows and any excess once interest on securitized bonds is paid.

Mortgage Finance and the Nigerian Real Estate Market: Issues and Opportunities

Brief background of Nigerian housing Market 

• Mortgage lending in Nigeria is still at infant stage, but all variables indicates potential growth in this sub sector.
• Housing Stock of 10.7million of which less than    5% is in formal mortgage market
• Housing deficit of between 15-18 million housing units
• Annual housing need of between 500,000 to 1 million housing units
• Housing finance contributes to Less than 1% of the GDP

Current State of the Housing Finance Sector

• Mortgage banks by their nature provide long term funding for home finance and real estate development
• To meet mortgage loan approval, proper analysis of mortgagor in terms of documentary evidence that show credit capacity has to be carried out
• The result of this analysis results to a credit structure that amongst others determine the frequency and means of collection/repayment

Real Estate Finance: Private Equity can ease Nigeria’s problem – ACTIS

For a nascent market like the Nigerian Real Estate industry, there are loads of problems punctuating the flow of development to make it compete favourably with other emerging markets. Core in these baskets of problem is finance: as finance windows such as mortgage, pension, bonds, and so on appear more as paper tigers.

In this chat with 3Invest Intelligence, Mr. Chu’di Ejekam, Director of Real Estate, Actis, opens up on the concept of Private Equity, especially in the Nigerian market. He spoke against the back drop of Actis as a reputable Private Equity Manager trying to redefine the Nigeria real estate space for optimum delivery. He opined that if the enabling environment is created, Private Equity has great potentials to ameliorate the nagging problem of finance in Nigeria’s real estate sector.