Introduction to Real Estate

Finance
In its broadest sense, real estate finance refers to
the utilization of any kind of financial resource in
order to produce, market, sell or purchase real
estate properties. Thus, it is a relatively broad field
of study which can cover all levels of the industry.
Financing real estate development
Developers, just like any producer, need funds to
produce real estate products. Large companies
employ either –

Equity – funds that are inherently part of

the company’s capital.
Syndication – funds pooled together
between a developer and several other
partners. Joint- ventures are a form of
syndication.
Public funding – funds
obtained from the public by a
listed company
Traditional Financing – funds
borrowed from banks and
financial institutions.
Pre-selling – funds generated
from prospective buyers.
Equity funds is limited only to those
contributed by its stockholders.
Because real estate projects require
massive capital and the return period is
sometimes unpredictable, only that
large developers undertake projects
using purely equity funding.
Syndication.
The basic syndication approach is to
initially pool funds of several investors
and create a separate company to
pursue a specific project. One common
syndication approach is the Joint
Venture.
There are many variations of JV’s:

Land JV - the developer saves capital

for land acquisition by partnering with
a land owner willing to provide its
property for development.
X-Deals – the developer saves capital
for building costs by partnering with
contractors and building materials
suppliers willing to barter their services
and products for the
project’s finished real estate products.
Public Funding
As companies grow and their needs for
funds increase, they can also obtain
funds from the general public. To do
this, they have to list themselves in the
stock exchange by undertaking an IPO
– Initial Public Offering. Public funding
is highly susceptible to a company’s
public image. Only well- established
companies with long-standing track
records succeed in this route.
Traditional Financing
The banking sector is of course a major
source of financing. Banks in the Philippines
are relatively liquid and have funded many
real estate projects. The Central Bank
continues to monitor the level of funds going
to real estate as part of a safeguard mechanism
against a property bubble. After all, if the
bubble results in over-supply and massive
default of debtors, the banks will end up with
large inventories of non-performing real
estate assets.
Many of the large developers are
companies which are part of
conglomerates with banking
subsidiaries. In the Philippines, some of
them are -- Ayala (BPI, BPI Family),
Federal (Metrobank), SMDC (Banco de
Oro).
Some inter-related developer+banking
relationships are not very visible but
they can be seen if their respective
directorates are examined for inter-
locking relationships versus their
respective real estate loan portfolios. In
other countries, there are strict
regulations governing inter-locking
relationships between real estate
developers and banks.
Pre-selling
This practice is one of the most successful
marketing+selling strategies of local developers.
It is legal but poorly regulated by government. It
is tacitly encouraged by government because
license to sell are already issued just after a
project breaks ground and on many instances even
before construction has seriously commenced.
Pre-selling allows developers to generate as much
as 20% of its projected revenue even before the
project is completed. The practice is also used as a
real-life measure of marketability. Buyers of pre-
selling units are attracted by promises of lower
acquisition prices but also take the risk of a
project failure.
The conventional pre-selling
approach goes like this –

Buyers will deposit a small reservation

fee (ranging from P5,000. to P
30,000.)
A contract to sell is prepared. The
contract will require
A down payment of about 20%
payable over 24-30 months
The full balance payable after the
DP period either in cash by the
buyer Or thru bank financing.
For a Buyer of a pre-selling
project, there are two financing
distinct stages –

The DP (Down Payment) Stage – 24 to

30 months;
The Amortization Stage – anywhere
from 5 years, 10, 15, 20, etc.
Pitfalls:

Monthly rates can zoom up. Many

buyers are attracted because the
monthly payment during the DP stage
is low And it is “zero-interest”.
However , the monthly payments
during the Amortization stage is usually
not yet defined and buyers can be
caught unaware.
Properties might be encumbered.
Some developers have the pernicious
practice of mortgaging several titles
altogether with a bank. This means that
after you have paid the down payment
in full and are ready for your own
mortgage, the title is not yet available
because it is in turn mortgaged by the
developer to a creditor.
Conventional Bank Financing
through a Mortgage
The Philippines is experiencing a
transformation in real estate financing.
In the past decades, banks were
extremely conservative with respect to
real estate lending. Today, real estate is
one of their favorites.
Two vital factors affect the real
estate finance --

Interest rate
Term of the Loans

Interest rates have plummeted from

highs of 18-24% several decades ago to
lows of 5-8% today. Loan periods have
also become longer and some banks
today offer up to 20 years.
What to watch for in bank
financing:

Look for the lowest interest rates

available.
Lowest does not just mean nominal
rates. Some banks offer a rate that may
seem very low but it is good for only
one year and re-priceable annually.
Thus, it is good to inquire about a
bank’s re- pricing practice. Are the new
rates based on an index or just the
bank’s whim?
Look for a longer term.
The only purpose of obtaining credit is
to make the monthly payment
affordable. Otherwise, if you have cash
to spare, something not used for any
other more lucrative purpose, then no
need to borrow on real estate. To make
the monthly payment affordable, the
interest rate should not just be low but
the loan term should be as long as
possible. Anyway, the borrower can
always accelerate the payment if he
becomes more liquid in the future.
Understand the Loan Conditions.
It is also important to read, scrutinize,
the fine print of the mortgage contract.
Find out if there are high closing costs,
other hidden charges, such as insurance,
appraisal, etc.
Check for the following --

Prohibited provisions such as “Pactum

Commissorium” (auto-sale) or “Pactum
de Non Aliendo” (prohibiting sale);
Conditions that will be considered
“default”
Foreclosure and redemption provisions
and costs
Liquidation provisions, pre-termination
charges
Thank you!