As a result of the huge capital outlay needed for
real estate development, developers usually source for fund in order to
complement their equity capital. Large developers will usually have multiple
funding arrangements with a variety of financial agencies. Nevertheless, the
field is becoming so complex and competitive that effective project management
is increasingly concerned with the way in which control over a particular
scheme will be influenced by the origin and nature of development finance.
There are various sources through which the developer can get fund to finance
real estate development.
1. Equity Capital
This is the fund realized from personal savings and
family savings. It is usually low because of low per capita income, unequal
distribution of income and high population in each family unit resulting in excessive
consumption, low savings and low investment in Nigeria. Since this equity capital
is usually small, it is prudent for him to decide on a mixture of equity and
debt capital which will not only guarantee the highest expected return but also
not impair the viability of the development. A developer’s ability to borrow will
be enhanced by the size of equity capital at his disposal.
2. Direct Loans
These are the loans got directly from the various lenders
such as banks and other financial institutions for a specific period. They are classified
according to their duration, short, medium and long terms.
(a) Short Term
Loans: The conventional method of raising funds for the acquisition of land
and the subsequent development of potential investment property over a two to
three year period is by way of short-term finance. The traditional sources of
short-term finance are the commercial and merchant banks as well as finance houses.
The terms on which these loans are provided are usually very stringent and the interests
charged are usually on variable interest basis and 2 percent to 6 percent above
basic rate.
In the past, joint stock or clearing banks have also been
involved in this kind of loan.
One advantage of loans in commercial banks is that a
substantial proportion tends to mature, within 1-5 years. Most times, the forms
of collateral security demanded by the banks are not quite satisfactory and
prospective borrowers are deterred by these rather inflexible demands.
Merchant banks too have the same maturity pattern as commercial
banks but are even more concerned with liquidity.
In an effort to mobilize funds into residential housing
sector, commercial and merchant banks were directed by the Central Bank of
Nigeria to treat the residential sector as a preferred sector and allocate at
least 7 percent of their loanable funds into the sector. The guidelines further
stipulated that where the total housing loans granted by the banks in any given
year is lower than the level prescribed by the central bank, the short fall
will be taken from the banks and on lend through the Central Bank to the Federal
Mortgage Bank. Loans for residential building construction were for a minimum
period of 15 years. However, these guidelines have not been strictly complied with
as the banks are structured to accommodate comfortably short term lending. Property
companies also provide short-term loans to developers.
(b) Medium Term
Loans: These are loans granted for periods not exceeding 10 years. They are
normally obtained by direct loan or overdraft from the commercial banks. Such
loans are frequently raised while arrangements are being made for long-term
loans. The banks are free to lend to whom they choose. Loans are repaid in a
lump sum or by arrangement, and are subject to recall by the bank at any time.
(c) Long Term
Financing: Long-term development finance as its name implies is finance
that is redeemable within 20 to 30 years or even more and usually at a
relatively lower rate of interest. The greater equity participation providers
in Nigeria are the Federal Mortgage Bank of Nigeria, various states’ property Development
Corporation and Insurance and Assurance Companies etc. Their lending activities
are concentrated mainly in the residential housing sector. Long-term development
finance has traditionally been raised either by mortgage or particularly in
terms of credit squeeze by sale and leaseback. Another aspect of long term
financing is the forward sale, which is normally provided by the insurance
companies and pension funds. These companies tend to exercise extremely tight control
over the entire project, including land acquisition, design, construction and
sale or letting of the project.
Key points:
Sources of finance for real
estate development
·
Internal
funds
·
Funds
from private investment
·
Merchant
banks
·
Mortgage
banks
·
Government
bonds
Problems encountered in securing
development finance from the financial institutions
·
Excessive
protocol and bureaucracy
·
Collateral
security
·
Restriction
of government policies
·
High
interest rate
·
Loan
ceiling and duration
Ranking the various requirements
for loan in the various financial institutions
·
Approved
building plan
·
Bill
of quantities
·
Feasibility
and viability report
·
Evidence
of past performance
·
EIA
REFERENCES
Atterberry, W.: Modern Real Estate Finance. Ohio Grid Publication
(1980).
Balchin, Pn, Kieve, J.L. and Bull: Urban Land Economics. The
Macmillan Press Ltd., London (1988).
Cooper, J.R.: Real Estate Investment Analysis. Lexington Books
(1974).
Denman, D.R.: Land Use: An Introduction to Land Use Analysis.
The Estate Gazette Ltd., London (1968).
Gerald, B.R.: Property Investment and the Capital Markets. E
& F N Spon, London (1991).
Lewis, M.G.: When Real Estate Becomes Big Business: Mergers,
Acquisitions and Joint Ventures. Cahners Publishing (1974).
Lichfield, N.: Economics of Planned Development. The Estates
Gazette Ltd., London (1956).
McCarthy, J.F.: Highway Financing by the Toll System. Bureau
of Public Administration, University of Califonia, Berkeley (1954).
Megarry: Manual of the Law of Real Property 6th Ed. Stevens
& Sons Ltd., London (1982).
Oprenheim, P.: Property Financing Methods, The Estate Gazette
Ltd., London (1973).
Paish, F.W.: Business Finance. Report of Committee on Finance
and Industry. Macmillan (1953).
Ratcliff, R.U.: Real Estate Analysis. McGraw Hill, New York
(1961).
Ratcliffe, J.: An Introduction to Urban Land Administration.
The Estate Gazette Ltd., London (1978).
Rics: Finance in Property. Royal Institute of Chartered Surveyors
(1977).
Ruddock, L.: Economics of Construction and Property. Edward
Arnold, London (1992).
Contributed by
Nelson Ogbonda,
CEO
+2347033577278
riverspropertyexchange@gmail.com
