Financial Structures for Real Estate Assets

Financial Structures for Real Estate Assets

Financing Structures

Financing structures are an important element for the supply and provision of new property investments. Specifically, you should be aware that the main factors are the cost and availability of finance. Besides, you should recognise that financing is the determinant of the most suitable holding structure for a real estate asset. This is critical both for the development & planning of new projects and the investment market of secondary acquisitions. Besides, another important point that you should remember is the fact that investment value is correlated to the availability (or no availability) of adequate funding opportunities (at the prevailing interest rates in the market).

Basic Structures

Variation in the proportions of equity and debt capital.

Investment companies are usually levered (i.e. higher proportions of debt than equity). That means the overall capital structure consists of debt capital. Why is this the case? As you may recall from your entry-level modules in Real Estate Finance, the potential of future growth in real estate valuation (both for capital and yield purposes), creates a safety net for lenders to consider injecting debt capital into property vehicles.

Debt maturity profile

You should be aware that the debt maturity profile provides a framework for structuring real estate holdings. Debt maturity refers to the end dates when the various debt instruments expired, i.e. to be repaid back to the lender. A short-term maturity profile does not provide the flexibility to the property owners (the equity holders) to generate value and yield alike. Equity holders prefer long-term maturities. But do you reckon this is also a preference for debt holders? Yes, but only for special types of lenders, such as bank lenders or pension funds with long-term investment horizons.

Asset and Liability Matching

The repayment (or refinancing of debt) should coincide with major events such as a sale (or disposal) of an assets. Besides, the payments to the debt holders (such as interest payments and not only principal payments) ideally should be in line with rental payments to match both the timing and magnitude. You should also remember that planning is an important aspect of Real Estate Finance, not only for the equity holders, but also for the debt holders. Therefore, the ability of a company to raise debt capital depends on providing a solid business plan which contains detailed forecasts.

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