Week 7 development risks + finance Flashcards
main sources of finance
o Institution
o Banks and building society
o Property companies and the stock market
o REITs
o Overseas investors, Private equity, JV, Government
main methods of financing
o Forward-funding o Bank loans o Mortgage o Corporate finance o Unitisation and securitisation
Insurance companies and banks used to provide long-term and short-term finance respectively.
However, insurance companies became reluctant to write long-term, fixed-rate loans.
Why?
reverse yield gap)
1. The amount by which the bong yield exceeds equity yield
- Interest rates on loan exceed rental values as a percentage of the cost of properties
- What will happen to the fixed-rate loan with high inflation
pros of the property markt
Hedge against inflation: to secure real-term (net of inflation) gains
Institutional lease: merit of long-term lease, guaranteed future income
cons of the property market
Illiquidity and indivisibility; cannot be sold quickly and in pieces, high transaction cost
No Centralised market: no common marketplace for property transactions
Management: requires a high degree of management skills (tenant reimbursement is one option)
Research costs
Yield and rent measurement: it helps alleviate concern level (cannot compare one yield to another, what is the appropriate level of rent for each dwelling?.
Still hard to define
explain banks and building socities
Banks expanded from short-term finance to medium- or long-term finance.
In market downturns, banks did not want to hold bad-debts on their books. (stress test after GFC)
Banks require safety tools such as:
Pre-sale or pre-let (around 70%)
Additional collateral
Lower LVR(a.k.a. LTV) or LTC
Q: Would banks like to retain foreclosed assets on their book?
Building societies tend to lend smaller loans with less competitive interest rates.
If things go wrong what actions can the bank take
Principal reduction Interest rate deduction Temporary interest-only period Debt-Equity swap Foreclosure/Forced sale
explain property companies and the stock market
You may find equity investors among property investment companies.
They would be more interested management aspect compared to banks. (utilising their network with tenants)
95% occupied property vs. 60% occupied property. Which is more appealing to the property companies?
Share price of listed property companies are normally valued below the NAV (Net Asset Value).
What are the risk factors of shareholders of these companies?
Share market is more volatile.
Discount to the NAV
Unforeseeable risk regarding future exit (sale) of the portfolio
Level of gearing (ratio between indebtedness and equity)
what is REIT
Real estate investment trust
Tax advantage at the trust level (not paying cooperate tax)
A-REITs (Australian real estate investment trusts) give investors access to property assets.
A-REITs provide access to assets that may be otherwise out of reach for individual investors, such as large-scale commercial properties.
A-REITs may appeal to investors looking to diversify their portfolio into property with potential to receive a regular and consistent income stream.
hoe does REIT generate wealth
REIT Generates wealth in two ways:
- capital growth and
- rental income.
o The fund manager selects the investment properties and is responsible for all administration, improvements, maintenance and rental.
o While each A-REIT will have its own of characteristics, the properties selected are usually diversified across regions, lease lengths and tenant types.
o See page 126, 127 for UK and US REIT
explain forward funding
The term given to the method of development finance which involves a pension fund or insurance company agreeing to provide short-term development finance and to purchase the completed property.
Advantage of forward-funding
o Higher yield compared to direct investment on completed property
o Control over design of scheme and tenant quality
o Upside of rent increase is captured by institutional investor.
o Both parties (lender and developer) agree on terms such as:
o Yield, rent, development costs (maximum agreed development costs), developer’s profit
o Sale and lease back: A sale and leaseback involves the freehold of the scheme passing to the fund on completion with the fund simultaneously granting a long lease to the developer, who in turn grans a sublease to an occupational tenant.
explain JV and partnership
JV is a type of partnership with more flexibility.
Jointly owned by two or more partners
General Partner (GP) Partner whose liability is not limited Limited Partner (LP)
Passive partner whose liability is limited to its contribution
GPs plays active roles in acquisition, management, disposition, while LPs are passive partners.
explain bank loan
For smaller developers, it is easier to have access to bank loans compared to forward-funding.
Since bank loans are debt, developers do not need to share the profit.
Bank loans have different types:
Corporate loans: loans secured on corporate assets.
Project loans: secured against a specific development project. (a.k.a. project financing).
suitable for developers with little assets.
What if you do not have track-record?
Investment loans: switching construction loan to perm.
Syndication: In case a single lender cannot cover the
whole loan amount, a few lenders can make a loan together
what is syndication
In case a single lender cannot cover the whole loan amount, a few lenders can make a loan together
explain mortgages
A mortgage is a loan secured on a property whereby the borrower has to repay the capital loan plus interest by a certain date.
- Hard to secure the lender due to reverse yield gap.
- Prepayment risk: How would you protect the lender from prepayment risk?
- Prepayment penalty
- No-prepayment period
