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Raising Capital in the Real Estate Industry

Crowdlending as a Financing Source

Written by E. Davis, D. Magnusson & M. Wiberg

Paper category

Bachelor Thesis

Subject

Architecture & Real Estate

Year

2019

Abstract

Thesis 2.4 Common sources of funds for real estate developers Since the financial crisis, it has become more difficult for SMEs to obtain funds for real estate projects (Montgomery et al., 2018). Participants in financing development projects have relatively short operating hours, new participants enter the market, and other participants withdraw. Competition is fierce, and more sensitive information may be difficult to obtain and access. With this in mind, financing options for real estate development are complex (Coiacetto and Bryant, 2014). One of the important aspects is that banks have to restrict and increase the requirements for real estate financing due to related risks. Bachelor project As the outstanding real estate loans on bank balance sheets have become tighter, the impulse for alternative investments has increased (Spek, 2017). Real estate developers face difficult decisions on how to finance projects. As cash flow and returns are difficult to guarantee, it is important for developers to consider short-term and long-term financing when implementing and advancing development projects (Coiacetto & Bryant, 2014). In order to successfully finance the project, it is necessary for real estate companies to communicate the value of the project, and these values ​​need to be evaluated through wise decisions (Schwizer & Zhou, 2017). The demand for funds during the development process is constant, and funds need to be provided for construction costs, sales process, lease or ownership, residential design or marketing costs, etc. (Coiacetto and Bryant, 2014). It is recommended that developers use different funding sources (Coiacetto & Bryant, 2014). The most common source of financing for real estate is debt, usually in the form of credit. Debt can be obtained from many sources, but one of the main sources is through banks (Sokoli, 2016). Coiacetto and Bryant (2014) argue that development projects are financed through the use of debt rather than equity because the value is guaranteed. This is because debt loans are usually held in mortgage loans, and equity does not promise any return in terms of default, so equity is considered a higher risk. Other ways of financing real estate can be done through community infrastructure taxes. For example, in order to improve infrastructure and its residents, cities can create funds to support real estate development. These funds can be raised through taxation. In the United States, tax incremental financing (TIF) is essential for infrastructure project financing (Squires et al., 2016). The construction and development of real estate projects is very attractive to government support because it will create more labor demand and reduce unemployment (Sokoli, 2016). 2.5 Swedbank's real estate loans The main financial intermediary for financing real estate development is through banks (Sokoli, 2016). The Swedish banking system consists of some of the larger players in the market (Papadamou & Siriopoulos 2012). Banks are controlled by monetary policy, which emerged after Sweden faced the financial crisis in the 1990s. Riksbanken (Swedish Central Bank) completely lifted the previous restrictions on bank lending in 1985, thereby placing the Swedish Bank in charge of lending policy. As a result, Sweden was hit by the real estate bubble in the 1990s, which had a significant spillover effect on the financial market (Papadamou & Siriopoulos, 2012). In 2008, Sweden experienced another economic recession, which led to a decrease in outstanding loans. Due to outstanding credit, Swedbank began to suffer heavy losses (Nilsson & Öhman, 2012). Since the financial crisis, Swedbank has restricted and minimized real estate loans (Papadamou & Siriopoulos, 2012; Nilsson & Öhman, 2012). According to the author, Nilsson & Öhman (2012) banks have defensive behaviors in their lending strategies because debt collectors lack experience. It is worth noting that banks are more likely to reduce credit losses by reducing loans than by not lending to detect credit losses. The results show that debt recipients must display more mortgage assets while paying higher interest rates to borrow from Swedish commercial banks (Nilsson & Öhman, 2012). Before deciding whether to approve or reject the real estate, the bank usually considers the feasibility of the project, project management, business plan, financing plan, accessibility, the owner’s experience, pre-contracting or receiving potential from customers, partners, and quality loans for the project . Other aspects include land costs, construction costs, project costs, marketing costs, legal aid costs, and interest costs, for example (Chiriac and Ofileanu, 2015). It is recommended that borrowers who maintain long-term relationships with banks will be more likely to obtain loans with less collateral. In addition, this relationship reduces the time to process loans (Bachelor project, Behr et al., 2011), which means that banks value the relationship and trust with debtors when approving credit. In addition, this helps to better estimate the level of risk that the bank manages, thereby reducing borrowers' interest rates and securities premiums (Maier, 2016). Among Swedish companies, 56% of companies have at most two relationships with different banks (Ongena & Smith, 2000). This shows that there is no fierce competition in this market. Read Less