An astonishing fact about the real estate sector is that the financial scheme that they follow comprises many facilities. Even after that, many companies fall short or go bankrupt due to discrepancies in planning and eventually fail running at full brisk. Long term finance in real estate or real estate project finance along with bond market integrity can help in exterminating those risks. The major risks that big real estate corporations face from time to time are maturity mismatch and asset/liability management. Failing to address these can result in serious losses and the eventual closure of a company. In this blog, you will get to know how long term finance in real estate or real estate project finance and the strong bond market can actually tackle them.
How financial discrepancies can create havoc in the real estate sector?
Maturity mismatch is a situation when there is a discrepancy between a company’s short-term assets and short-term debt. Maturity mismatch creates an imbalance in a real estate sector’s balance sheet. There are two things that create a maturity mismatch in the real estate sector:
- if short-term liabilities or debts have more value than short-term assets of a real estate company, financial obligations become misaligned.
- if the real estate company relies solely on short term assets to fund long-term assets or major investments, there will be misalignment between a company’s hedging instruments and underlying asset maturity.
Maturity mismatches henceforth estimate the situation of a company’s asset liquidity. They work as a fingerprint of the company’s disorganization in the treatment of the maturity of its assets and liabilities. As a result, we can signify that the company is not using its assets efficiently. This results in the squeeze of liquidity of the long term assets, which will incur future losses. For example, this mismatch can mature an underlying one-year-long bond only in 6 months due to not clearing liabilities in time through installments or other financial schemes. Henceforth, long term finance in real estate or real estate project finance or real estate project finance can easily solve these problems.
How real estate sectors can avoid the liabilities of maturity by real estate project finance?
Real estate project finance is an independent capital investment in the sector. These are the distinctly identifiable projects generating continuous cash flows and assets. In the real estate sector, equity is a kind of capital stack that is used to finance all the projects.
To establish long term financing, a long term bond market is a dire necessity. According to the central bank of Bangladesh, In the absence of a sufficiently large corporate bond market, an overly large burden of corporate lending is taken on by the banking system and creates maturity mismatch in the market.”
That is to say, an outline of long-term finance in the real estate sector can actually reduce the crisis. A major portion of the country’s investment happens from here, and therefore it is high time the industry should adopt the long-term schemes.
Long term bond markets are necessary offshoots to boost the efficacies of non-performing loans that incentivize investments. More investments mean more chances for profits. Long term finance in real estate or real estate project finance can minimize the risks of poor accounting transparency, moral hazard problems, regulatory imperfections. Hence, as a whole, this simplifies the complication in the delay of corrective measures.
Key benefits of the capital stack in real estate project finance
The capital stack is a real estate jargon that refers to “the organization of all capital contributed to financing a real estate transaction or a company.” Therefore, this stack determines all the relations of the entities in the real estate sector. Capital stacks shed light on the following factors in funding real estate projects:
- Provides security and priority to various lenders included in the stack
- Recording the term to match the length of time it takes to develop and sell the project
- Balancing the trade-offs between fixed and floating interest rate
- Fixing the price around equity
- Capital stack draws schemes for construction loans for financing
4 key factors for strengthening real estate project finance
Before going into a long term financial plan in real estate through strengthening bond markets, four key factors should be considered.
- The financial system should channel a scheme of savings from corporations backed up by an adequate supply of financing with long maturities. This helps to meet the growing investment needs of the real estate economy
- Entities with long-term horizon commitments should be a part of the capital stack and supply real estate project finance.
- A multifacet spectrum of hedging or financial instruments should be available to support long-term investment.
- An efficient national financial system should promote economic growth through stable cash flows of long-term finance. This should have a support structure by appropriate regulatory bodies.
These are the ways a real estate company can easily avoid any forms of financial discrepancies. For your queries, please do let us know in the comment section below.
