Sources of financing for real estate. Real estate transactions. Positive and negative points

Goals

After studying this chapter you will be able to:

Reveal the role of various sources in real estate financing;

Select the most suitable financing mechanism for the development of a particular property;

Show the features of financing real estate development in Russia and abroad.

The problem of financing real estate development is the most important among those faced by developers.

Essentially it breaks down into two tasks:

optimization of the ratio between equity and borrowed funds when financing a project;

using the most effective sourcesand mechanisms attracting external financing and returning attracted resources.

5.1. Own and borrowed funds in financing real estate development

The developer’s first task is to find the optimal ratio between equity and borrowed funds, i.e. one that would ensure maximum efficiency of equity capital and at the same time would not repel potential investors.

It is known that a development company, like any other, has several possible sources of financing from its own funds:

- profit,

- depreciation charges,

- funds received from the issue of shares.

Each of these sources has its own “investment” potential.

 Everyone from These sources have their own price, their pros and cons. Thus, profits can be quickly mobilized for investment, but used for investment only after taxes have been paid, and, therefore, each ruble invested from profits is “worth” to the firm as much as the income tax that must be paid before using it.

Depreciation, at first glance, is a source that costs the company nothing at the present time; however, firstly, its size is limited by the norms of depreciation charges (today, as is known, several such norms are in force for different categories of property: for buildings and structures, for example, the annual depreciation rate is set at 5%, and with accelerated depreciation it can be increased by no more than twice); secondly, depreciation is a source of reproduction of an enterprise’s property and, using it for investment, the enterprise may find itself in a situation where it has Not there will be funds to replace equipment; thirdly, an increase in depreciation charges leads to a decrease in profits (and, therefore, ceteris paribus, dividends) and, therefore, reduces the attractiveness of the enterprise for external investors.

The third source of own funds is increasing equity capital by issuing shares (preferred or ordinary). The price of these funds is determined by the level of dividends that shareholders will demand for their investment in shares. In addition, increasing share capital has other features - on the one hand, the issue of shares allows you to raise funds for an indefinite period, does not require their return and (in relation to ordinary shares) does not imply obligations regarding the level of dividends. On the other hand, the issue of shares expands the number of shareholders, complicates decision-making and may even lead to the loss of control over the company's property.

In addition to the above-mentioned circumstances, the main thing is that when implementing investment projects in the field of real estate, the development company’s own funds are not enough to provide the required amount of financing.

Developers' own funds are always only a part of all funds invested in real estate development projects.

Lack of own funds to finance investment projects, their In some cases, the higher price compared to borrowed funds requires the attraction of external sources of financing.

In this regard, the problem of determining the optimal ratio between equity and borrowed funds arises.

 One of the specific features of the modern Russian situation is that, along with own and borrowed funds, there is also the concept of “raised” funds (Law of the Russian Federation “On Investment Activities in the Russian Federation.” Article 8), attracted, as a rule, on the basis of agreements about joint activities. In fact, these are funds from future users of real estate, costing the developer significantly less than borrowed funds.

Determining the ratio between equity and borrowed funds is based on three main criteria.

1. The ratio of the profitability of the project and the cost (price) of borrowed funds should ensure the efficiency of equity capital at the required level (not lower than the overall profitability of the project).

If the profitability of the project is higher than the fee for using borrowed funds, then this ensures a higher return on equity capital than the overall profitability of the project. (Consequently, the use of borrowed funds is profitable - the effect of positive financial leverage). Otherwise, the efficiency of equity capital will be below, than the overall profitability of the project.

 This thesis can be illustrated with the following example.

There are two projects that require the same amount of funding, let’s say 1000 million rubles. Both projects bring the same profit in the amount of 200 million rubles. If you do not take into account taxation, then the profitability of the projects is the same - 20%. But, in the first case, only own funds are used to finance the project, and in the second, 500 million rubles. are own funds, and 500 million are borrowed funds. The interest rate for using borrowed funds is 15%. What happens to the return on equity in these cases?

For the first project, the return on equity is equal to the total profitability and is the same 20%. For the second project the situation is different. Before determining the return on equity, we must subtract from the profit received the funds paid for the use of borrowed funds - 75 million rubles. (15% of RUB 500 million). Accordingly, the return on equity will be in this case is equal to 25% (125 million rubles: 500 million rubles 100).

Thus, the use of borrowed funds made it possible to increase the return on equity from 20 to 25% during the implementation of the second project. This increase in the return on equity, obtained through the use of borrowed funds, is called in financial theory the effect of financial leverage (leverage).

This effect, as is easy to see, arises from the excess of profitability over the price of borrowed funds and in this case is positive. But another option is also quite possible - if the price of borrowed funds were not 15%, but, for example, 25, then the return on equity would now be the indicated 15°/”, i.e. would be lower than for the first project, and the effect of financial leverage would be negative.

In the above example, you can introduce profit taxation, bringing it closer to reality. Then, with an income tax rate of 35%, we obtain the following data (see Table 9). |

Table 9. The impact of borrowing on return on equity

As we can see, the introduction of taxation reduced the effect of financial leverage (by the amount of the profit tax rate), but, nevertheless, the return on equity remained higher than in the first project.

2. The ratio between equity and borrowed funds should create a “tax gap for one’s own profits.

It is easy to see that in the above example it is assumed that fees for the use of borrowed funds are excluded from taxable profit.

According to the current Russian legislation, as is known, this rule applies to interest on loans within the refinancing rate established by the Central Bank of Russia, increased by 3%. Beyond these limits, interest on loans must be paid out of after-tax profits, i.e. Each percentage of the loan fee is increased by another 0.35% (at the current income tax rate). Consequently, the use of borrowed funds clearly allows you to increase the profitability of your own funds as long as the fee for the use of borrowed funds is lower than the profitability of the project and does not exceed the limit for inclusion in the cost established by current legislation.

In addition, if borrowed funds are used to finance a project, then the interest paid to the owners of the borrowed capital is a deduction. from profit before tax. Comparing the total returns on invested capital in a firm using a combination of debt and equity and a firm using only equity, we find that they differ by the amount of non-withdrawn taxes on interest payments on borrowed funds in a firm using a combination of debt and equity. These savings are observed over the life of the project, thereby increasing the net present value of the project by an amount called the tax shield. The value of the latter is equal to the annual tax savings capitalized at a rate equal to the interest rate on the loan.

3. The ratio of equity and debt capital should create the opportunity to attract external financing.

Firstly, the size of one’s own contribution to financing the project must be sufficient for external investors to be confident in the seriousness of the developer’s intentions. In this case, it is not even the ratio of the developer’s own capital to the total amount of financing that is of decisive importance, but the ratio of the own funds invested in the project to the total volume of investments of the development company and its own capital.

Secondly, the return offered to the investor must be competitive with possible alternative investments.

The creation of any real estate property is an investment project with its own financial support system. Forms of real estate financing (real estate transactions) include: self-financing, financing using borrowed and raised capital.

Self-financing is the financing of real estate transactions using the own capital of enterprises, citizens, and the state. It can be carried out through the use of various forms of allocation and accumulation of financial resources. Among them:

1. Investment and other funds of enterprises and government bodies.

Investment funds of government bodies are formed mainly from funds received from the budget (for investment purposes); this may be part of the depreciation charges of municipal and state-owned enterprises (up to 50%) and enterprises of other forms of ownership (up to 30%); extra-budgetary income, etc. The formation of this type of funds is regulated by regulations of authorities at the appropriate level.

2. Housing and construction cooperatives (HBC).

This is a voluntary association of citizens and (or) legal entities. It is formed for the construction of residential buildings and their subsequent operation, as well as for the acquisition of residential buildings subject to major repairs and reconstruction. Members of the cooperative acquire (build) the corresponding residential premises only for use, retaining ownership rights only to the share. There are more than 1,800 housing cooperative buildings in St. Petersburg.

3. Housing and savings cooperatives (HSC).

A type of consumer cooperative that combines the qualities of a financial and housing construction cooperative. The purpose of the activities of housing savings cooperatives is to satisfy the needs of cooperative members in residential premises by pooling share contributions by members of the cooperative. ZhNK is the attraction of shareholders who are able to annually contribute their share to the cooperative, then accumulate funds and alternately buy apartments for each member, both in the primary and secondary housing markets.

4. Construction Savings Banks (SSK).

This is a specialized bank under the supervision of the Central Bank with a limited list of banking operations aimed at attracting funds from individuals in order to provide loans to its depositors to improve housing conditions.

The main form of debt financing is mortgage lending (mortgage). This is a long-term loan issued by commercial or specialized banks, credit and financial institutions secured by real estate.

The subject of the mortgage may be the following real estate:

• privately owned land plots;
• enterprises, as well as buildings, structures and other real estate used in business activities;
• residential buildings, apartments and parts of residential buildings and apartments, consisting of one or more isolated rooms;
• dachas, garden houses, garages and other consumer buildings;
• air and sea vessels, inland navigation vessels.

Currently, the Republic of Belarus has developed an extensive classification of mortgage lending: by property, by lending purpose, by type of borrower, by type of lender, etc.

Let's look at the forms of a mortgage loan based on the method of amortization (loan repayment). Highlight:

1. Permanent (annuity) mortgage loan.

This form involves an organization of payments in which loan payments are made in the form of equal, usually monthly, installments over a certain period of time. At the end (or beginning) of equal time intervals, the borrower pays an equal amount, part of which goes to repay the main loan, and part to pay the interest accrued for the month. In this case, interest is charged on the balance of the unpaid amount on the loan.

At the beginning, most of the payment amount is interest, but gradually its share decreases, and the amount of payments on the principal debt increases. The total amount of payments remains fixed.

The considered procedure for repaying the loan gives the borrower stability in determining the size of his loan payments, and the borrower also pays less interest than if they were accrued immediately for the entire amount of the loan received.

2. Mortgage loans with variable payments are divided into:

• loans with a fixed principal payment;
• loans with variable interest rates;
• loans with balloon payments;
• closing mortgages;
• loans with participation;
• reverse annuity loans;
• loans with increasing payments;
• Canadian rollover.

The existence of a large number of mortgage schemes is due to the search for the most flexible and attractive conditions for borrowers and the least risky conditions for lenders.

Unlike a mortgage loan, the main positive aspect of a leveraged financing scheme is that it eliminates the need for collateral. The most common form of this financing is the issue of securities in the form of bonds, i.e. securities containing the obligation of the issuer (developer) to pay its owner the nominal value at the end of a specified period, and before the expiration of the period - to periodically pay a certain amount of interest.

The most common type of bonded loans is the bonded housing loan scheme. The peculiarity of such a loan is that the developer does not sell the ownership of part of the housing units, but securities secured by the ownership of the housing being built. One bond usually corresponds to 1 m2 of housing under construction. The issuer can issue bonds only in an amount not exceeding the total footage of the housing being built. Having accumulated a package of bonds sufficient to purchase an apartment, a citizen has the right to exchange it for housing of the appropriate size. The maximum period for circulation of bonded housing loan shares in Russia is 10 years.

Savings schemes through raising funds through housing loans have a number of advantages compared to mortgages:

• there is no threat of eviction in case of loss of solvency;
• prices are 2-3 times lower than the price of m2 of housing purchased through mortgage lending schemes;
• does not require constant monthly payments;
• funds for housing can be acquired gradually, as financial opportunities arise.

A popular addition to credit opportunities in the real estate market can be transactions when part of the shares of an enterprise are purchased only for the period of the investment cycle and with an absolute obligation of the owners of the controlling stake or the project operator (management company) to buy them back at the price agreed in the business plan at a certain point in the investment cycle .

A product such as mezzanine financing has appeared on the Russian investment market. Mezzanine financing is a method of financing projects in which the investor provides funds in the form of debt financing while simultaneously purchasing an option to purchase the borrower's shares in the future at a certain price, possibly subject to the occurrence of certain conditions.

This is an intermediate type of securities financing between a standard senior loan and equity. Interest on a mezzanine loan is significantly higher than conventional loans due to the lender’s higher risks. A mezzanine loan is provided for a period of at least 3-5 years with repayment of the loan body at the end of the term.

This financing instrument is most often used by developers who need additional financing for the construction of their facility. Mezzanine loans of this kind are often secured not by the property itself, but by shares of the holding company.

Mezzanine financing is usually offered by large investment banks and investment companies, hoping to use this financial instrument to increase the profitability of their assets. Since this instrument is high-risk, its share among others is small. Small banks, pension funds, and insurance companies work with this instrument very rarely precisely because of its riskiness and low liquidity.

The disadvantages of this financing model are: 100% bearing of all risks by the developer, fixed capital structure, later exit from the project, market risks.

The advantages of mezzanine financing include the simplicity and short time required to obtain such a loan, compared to a conventional bank loan. Applying for a mezzanine loan does not require the borrower to take out mortgages or fulfill various other bank requirements. Credit institutions providing mezzanine loans are ready to offer the optimal loan package for the borrower in the shortest possible time. Also, the advantages of this type of loan include maintaining control over the project, which allows you to get a higher profit when selling the property. In addition, the developer considers attracting capital to be his primary benefit, and the acquisition of a solid financial and strategic partner has a positive effect on the image of both the developer and the joint project.

Another promising area of ​​investment support for the real estate market is forward financing, or forward transaction. These are concepts related to transactions for the acquisition of real estate, where there is a time gap between the conclusion of the transaction and the transfer of ownership of the property. In the context of real estate, this is the acquisition of a building under construction or even design, when the transaction is concluded long before the completion of construction and receipt of ownership rights.

The main condition for applying the forward financing scheme is the sale by the project initiator of 51-100% of the property rights to the project in exchange for an obligation to implement the project. The investor, in turn, guarantees the initiator the payment of developer profit, determined by the difference between the market value of the completed project and the investment costs incurred within the project.

The forward financing is structured through a joint venture. The seller provides the land and is responsible for permitting procedures, construction and leasing. The investor finances all other project costs. Typically, the capitalization rate at which the completed project will ultimately be purchased is approved at the stage of concluding a joint venture agreement. The advantage for the seller is the minimum amount of transaction costs (the disadvantage is a higher capitalization rate compared to the market). The investor in this case benefits from a high capitalization rate, but bears some of the risks associated with the implementation of the project (renting risk, construction risks). This type of transaction is widely used in warehouse real estate. However, this scheme is the least profitable for the developer, since in this case the developer assumes all construction risks. In addition, it is possible to attract forward financing only for a highly professional project. There is also a risk that the object will not be completed on time, and in certain cases, returning the advance payment may also be very problematic.

Literature:

1. Asaul A.N. Economics of real estate: Textbook. – St. Petersburg: Peter, 2008. – 624 p.;

2. Barsukov D.P. Economics of real estate: Textbook. – St. Petersburg: D.A.R.K., 2010. – 516 p.;

3. Ivanova E.A. Real estate valuation: Textbook / ed. M.A. Fedotova. – M.: KNORUS, 2009. – 344 p.;

4. http://www.fellton.ru/news/12617/

5. http://www.v-fin.com/credit/mezonin/

The concepts of “method”, “form” and “sources” of financing real estate are differentiated, criteria are highlighted and a multi-factor model for optimizing sources of financing is proposed.

Securing real estate financing on the required scale is one of the most important for any real estate development project and, therefore, for every developer. One of the important characteristics of real estate is its high capital intensity. Since real estate is an expensive commodity, its purchase or construction requires a significant amount of capital investment. Raising funds for the purchase or construction of real estate is, on the one hand, an important measure, and on the other, an element of creating the profitability of such an investment. At the same time, financing of a real estate property often involves a combination of own and borrowed sources of financing. Therefore, resolving issues related to justifying the rational choice of financing real estate is an urgent task.

The results of the theoretical study regarding the sources, methods and forms of financing of real estate showed the following:

• both the number of financing methods and their composition vary;
• there are certain lexical differences in the names of financing methods;
• often the forms of financing differ little from the methods.

  To solve the identified problem, it is necessary to use an integrated approach. Thus, to solve the problem of compliance of the forms given by some scientists with financing methods, the approach proposed by V.V. Yanovsky is appropriate. To resolve such contradictions, the researcher distinguishes between these concepts and turns to the semantics of the categories “method” and “form”. The Russian language dictionary provides the following definitions of method and form: “a method is a way of practically implementing something; form is an external expression of something, conditioned by a certain content.”
  

  Based on the above definitions, one should agree with V.V. Yanovsky. whenever possible, use both the phrases “financing methods” and “forms of financing”. However, in order to avoid confusion, the method of attracting sources of financing within the framework of this study will be called the method of financing real estate objects. In the future, we will understand the form of financing of non-current assets as the external manifestations of the essence of the method. Thus, a particular financing method may have its own forms of external manifestation. Consequently, the forms identified within a specific method are united by their economic essence, which allows them to be attributed specifically to this method of financing. For example, raising a loan and issuing bonds are forms of debt financing (which is considered as a method of financing), so their attraction meets the conditions of repayment, urgency and payment and allows you to combine them within one method of financing real estate.
  

  Thus, we consider it appropriate to distinguish financing methods, and within them - forms of financing, which consist of sources of financing (Fig. 1).

  
  

  Financing methods	Features of the financing method
  Self-financing	Financing exclusively from own funds
  Corporatization	Financing through transactions with shares and other securities
  Debt financing	financing on terms of urgency, repayment, payment
  Financing on a consortium basis	Financing by combining opportunities with other business entities
  Leasing and selling	Financing not in monetary form, but in material form under certain conditions
  Government funding	financing exclusively from public funds, for strictly defined government programs and projects
  Preferential financing	financing on terms that are significantly more favorable than those existing on the market
  Project financing	Financing instead of the right to participate in sharing the results of the project
  Subsidization	Non-refundable financing
  Blended finance	financing through a combination of several financing methods

  Based on the individual characteristics of financing methods, it is proposed to identify certain methods and forms for financing real estate (Fig. 2).
  

  Financing of real estate objects involves a combination of own and borrowed sources of financing, which actualizes the problem of optimizing sources of financing. In this aspect, we propose to carry out multi-criteria optimization of sources of financing for real estate. When formalizing any optimization model, a prerequisite is its direction, which in general terms can involve either maximizing or minimizing the result.

  
  

  Rice. 2 -

  The criterion for the volume of generated sources of financing for real estate must be equal to a certain volume of the need for funds. At the same time, an insufficient volume indicates the ineffectiveness of the current real estate financing policy, so for this criterion it is advisable to consider the maximum value of the criterion optimal.
  

  The criteria for minimizing the time to attract sources of financing and minimizing the costs associated with obtaining financing already in the name have a certain focus on minimization.
  

  The criterion for compliance of the structure of funding sources with the target financial structure of capital recognizes as optimal the alternative that has the least squared deviation from the target financial structure of capital.
  

  Thus, the optimization problem is that it is necessary to choose such a single alternative (combination of funding sources) x* from the set of feasible alternatives (all possible combinations of funding sources) X. The formalized model of multicriteria optimization has the following form:

  Where: y v =f v (x)- target function for optimizing the volume of financing;
  

  y t =f t (x)- target function for optimizing the time to attract financing;
  

  y c =f c (x)- target function for optimizing the cost of attracting financing;
  

  y s =f s (x)- target function for optimizing the financing structure;
  

  X- many acceptable alternatives;
  

  x x is a separate alternative.

  Thus, the proposed optimization model allows us to select the most rational combination of funding sources in terms of compliance with volumes, timing, cost and structure of financing.

  Bibliography

  • Yanovsky V.V. Sources of financing for real investments and their economic justification: Dis. ...cand. econ. Sciences: 08.00.10. - Belgorod, 2002. - 170 p.

8.1. Investing in real estate

Under investing refers to the investment of capital in the implementation of projects in order to make a profit. The funds invested are called investments. In relation to real estate objects, the following are distinguished:

Real investments - investments in the creation (development) of real estate, reconstruction or technical re-equipment of enterprises (property complexes);

Portfolio investments – investments in the purchase of shares and securities of the state, development organizations, investment funds, insurance and other financial companies. In this case, investors increase their financial capital by receiving dividends - income on securities, similar to rent or deposit interest when storing money in banks. Money is invested in the creation (development) of real estate, since without material production there is nowhere to make a profit. Real investments of funds spent on the acquisition of shares and securities are made by organizations that have issued corporate securities to attract financial resources for the purpose of creating (developing) real estate;

Investments in intangible assets – investments for the acquisition of property rights and ownership rights (valued in monetary terms) of land, buildings, property complex; certificates and licenses, patents for inventions, certificates for new technologies, utility models, trademarks, brand names, etc.

Depending on the form of ownership, investments are divided into private, state, foreign and joint.

Private investment– this is the investment of funds by citizens in shares, bonds and other securities, as well as investments of enterprises and organizations with non-state ownership.

Public investment carried out by federal, regional and local authorities from budgets, extra-budgetary funds and borrowed funds.

Foreign investment- these are investments foreign citizens, legal entities and states.

Joint investments– these are investments on a shared basis between the subjects of the country and foreign partners.

Real estate is one of the most important investments. Income from direct investments in real estate and real estate-backed securities, when managed effectively, typically exceeds interest on borrowed capital and income on securities. Moreover, it is preferable for investors to purchase real estate as a means of securing obligations, since they are a real asset and have reliability, since they are “transparent” for assessing risks and calculating profitability.

Subjects of investment activities in the field of real estate are all participants in investment projects: investors, developers, performers of work, users of real estate, suppliers, banking, insurance and intermediary organizations, funds, etc.

Investors – individuals and legal entities investing their own, borrowed and raised funds in the financing of real estate and ensuring their intended use.

Investors can be:

The government of the country and the governments of the subjects of the Federation, Moscow, St. Petersburg, subjects with the status of autonomous republics and other entities (Tatarstan, Chuvashia, Komi, Buryatia, Yakutia, Tuva, etc.) authorized to manage state property, or management structures with property rights;

Local government bodies, municipalities represented by bodies and services authorized by law;

Business associations, organizations and other legal entities;

Joint Russian-foreign organizations;

Foreign organizations and other legal entities;

Domestic and foreign individuals;

Representative offices of foreign states;

International organizations.

Investors are direct investors of financial resources and other capital who act as buyers and users of real estate.

Investors can also be financial and industrial groups, investment funds acting as individual investors and in the form of a syndicate of investors.

To implement investment projects in the real estate sector, it is necessary to develop feasibility studies, conduct engineering surveys, develop design documentation for the construction and construction of buildings and structures, carry out reconstruction work, conclude agreements with contract construction and installation organizations for the implementation of construction, installation, commissioning works, etc. Investors can carry out the functions of the customer themselves, through the appropriate services or through intermediaries of legal entities or individuals endowed with the necessary rights to dispose of investments within the framework determined by the investor.

The performers of work in the implementation of investment projects in the field of real estate are survey, design and construction, commissioning and other organizations that carry out work on engineering and geotechnical surveys, design of buildings and structures, their construction and development of production capacities.

The performers also include engineering firms that do not have their own production facilities, but have specialist managers. These firms act as general contractors for the implementation of investment projects, engaging construction, installation and other organizations on a subcontract basis to perform various works. Specialist managers form and implement an organizational plan for the implementation of all work within the investment project, ensure coordination of the work of all involved organizations.

The implementation of investment projects in the real estate sector involves the use of a large volume of building materials, structures, products, technological equipment, including non-standard ones, electrical products, cable products, pipes, rolled metals, etc. Therefore, important participants in investment projects are suppliers of these products and their dealers.

A large group of subjects of investment activity in the real estate sector are the so-called institutional investors, which include insurance and investment companies, housing cooperatives, mutual investment funds, individual housing construction funds, etc. The purpose of these organizations is to attract available funds from the population, business entities and direct them for investment purposes.

The set of intentions and practical actions to make investments in real estate and ensure the specified financial, economic, production and social results is investment project.

Depending on the type of assets in which real estate investments are made, they are divided into real (capital-forming), financial and investments in intangible assets. In the domestic economy, real investments predominate; in countries with developed market economies, financial investments play a large role. The latter are associated with the acquisition, formation of a portfolio of securities and their sale, purchase and sale of financial obligations, as well as the issue and sale of securities. Financial investments are divided into straight(shares, bonds, bills and other securities) and indirect(trust passive investment, etc.).

Financial investment in housing securities secured by real estate or mortgage loans (mortgages) is an indirect investment. Housing financial investments are mostly complementary to real investments, that is, most investments, having gone through the technological circle, become real.

Investments in intangible assets include investments in the acquisition of property rights and ownership rights to land plots, forests and other real estate.

Depending on the directions of investment and the goals of their implementation, investment projects in the real estate sector are classified as housing, industrial, commercial, financial, environmental, etc. Environmental projects include projects that result in the creation of environmental protection facilities, improvement of the parameters of existing enterprises, etc.

Real estate investing is the acquisition of a specific property or housing investment instrument for the purpose of making a profit. Any real estate property in a market system with a developed economy and an established market is not only a stable asset, but also income-generating real estate. There are several theories according to which the purchase of personal property is also considered as an investment in real estate that generates income. Indeed, in countries with established market economies, any piece of real estate provides an increase in value (capital) over time and brings constant income to the owner. Thus, a particular piece of real estate is an investment instrument similar to stocks, bonds and other securities.

In Russia, against the backdrop of the rapid development of the market for government and corporate securities, investment institutions have not yet been formed to ensure liquidity and openness of the market and attract citizens' savings for investment in real estate. State policy in the real estate market, aimed at increasing income from the use of real estate, is designed to ensure an influx of collective investments in real estate, subject to the creation of an effective system for protecting the rights of investors, which will restore confidence in investment institutions.

The main instruments of such a policy should be strict regulation of the activities of investment institutions investing in real estate, and mandatory, regulatory disclosure of information about the activities of both investment institutions and other professional market participants.

Investments in real estate can be made in different ways: direct acquisition of real estate or rights to it for the purpose of subsequent development, purchase of buildings and structures for the purpose of their operation and generating income.

There are various investment tools and technologies for investing in real estate. The most widely used are: reinvestment of the company's own funds and borrowed capital, mortgages, leasing, debt obligations, mutual funds. There is a constant search for new ways and forms in this area, and various schemes for financial investment in real estate are being developed.

One of the main principles in the real estate investment system is financing function– movement of financial resources from sources of financing to final investors of real investments.

Investing in real estate is the process of providing and spending money to carry out investment activities in the real estate sector.

A distinctive feature of real estate investment at the present stage is its high integration into the general credit and investment sector.

The main forms of investment in real estate (including residential) can be structured according to the principle of building capital with which the property is purchased:

Financing using only equity capital;

Debt financing;

Financing using mixed capital - equity and debt.

Financing using only equity capital (non-borrowed funds), i.e. the buyer and seller pay for a property when making a transaction using only their own funds, is used quite rarely. Financing of real estate objects only through borrowed capital refers to a greater extent to special types of financing (construction loans, various types of municipal financing, etc.), requiring special technologies of financing, lending and insurance. Moreover, the loan form itself may have a complex structure, consisting of a number of credits and borrowings. Financing the purchase of housing by the population using only borrowed funds is also quite rare and requires additional insurance or other additional security.

The main way to invest in real estate is mixed financing. In this case, borrowed capital can also consist of several types of loans (or loans). Own capital can be contributed one-time, for example in the form of equity participation, or can be accumulated through various savings systems included in the general lending technology, as well as through savings in a bank, housing cooperatives, insurance policies, various accounts, the sale of existing property and other external sources of savings.

Each created real estate object is a kind of investment project with a separate financial system.

Real estate financing is of four types, namely:

• self-financing;
• using borrowed funds;
• using raised funds;
• mezzanine financing.

Each of them requires a more detailed consideration.

These types of real estate financing sources are nothing more than collecting/pooling the equity capital investors already have.

This type of facility security uses four types of fund collection:

• special organizations and government representatives;
• housing construction cooperatives, abbreviated as housing cooperatives;
• housing and savings cooperatives, abbreviated as ZhNK;
• build a savings bank, abbreviated as SSK.

Debt financing

The main type of this financing is mortgage loans or simply. This is a loan on a long-term basis, which can be obtained from specialized banks or credit institutions, with the collateral of your existing property. In this case, the investment actually takes the form of “real estate on credit.”

The following types of real estate can be purchased with a mortgage:

• plots of land owned by private individuals;
• factories or other structures intended for commercial use;
• residential premises, apartments and separate parts of houses and apartments, which include more than one room;
• other buildings for consumer purposes, such as cottages or garages;
• airplanes, ships and inland navigation vessels.

At the moment, in Russia there are many classifications of this type of lending, such as:

• by type of real estate;
• because of the loan;
• by type of occupying party;
• by type of organization providing the loan.

Thanks to a wide selection of mortgage schemes, everyone can choose a loan that suits their capabilities and desires, with attractive conditions for themselves and minimal risk.

Funding raised

This type of real estate financing differs from the previous one in that in the option under consideration there is no need for collateral, this is the main advantage of this type of fundraising. The main form of financing funds is concluding a transaction by issuing bonds, securities for which the issuer (the person who issued the bonds/securities) undertakes to pay a certain amount before the agreed date. However, until the return period has approached, the issuer pays a certain percentage of the amount received, monthly or by agreement with the holder (investor).

The most common bonds are home loan schemes. This type of bond has its own characteristics. According to this form, the construction company does not sell the investor a finished building or apartment, but only documents for ownership of the premises after its construction. Typically, one such document is equal to one square meter of housing under construction.

The construction company has the right to issue a certain number of such papers, their total number is equal to the number of square meters in the building under construction. The holder of sufficient such bonds can exchange them for a constructed apartment in the future (upon commissioning of the facility). The maximum life of securities does not exceed 10 years.

The savings schemes under consideration have their advantages over mortgage loans or mortgage loans, here is a list of these advantages for the investor:

• You can purchase housing (an asset) using this scheme several times cheaper than through a mortgage;
• in the scheme under consideration there are no mandatory monthly payments;
• You can purchase property bonds at any convenient time, everything depends only on the capabilities and desires of the investor.

Currently, real estate financing uses transactions from the category of additional credit opportunities, when the management company sells part of its shares during the investment cycle. The company that sells these securities undertakes, after the agreed time, to buy the shares back at the price specified in the agreement with the buyer.

Advice! It is attracted financing that is the most interesting, profitable and convenient form for investors working in the modern real estate market.

Mezzanine financing

Relatively recently, in the vastness of the Russian real estate market, we first heard about such a type as mezzanine financing of real estate. The type of financing in question is defined as a way of financing ideas and projects, as a result of which the borrower provides money in the form of debt financing and obtains the right to the borrower in the future at an agreed price or when special conditions arise.

Funding such a plan with shares as collateral is considered somewhere between a standard loan, where the main goal is its full closure, and equity. However, it is worth paying attention to the fact that the interest on this loan is several times higher due to the increased risks of the lender. Such a loan is issued for a period of 3 years, with mandatory repayment of the principal debt at the end of the term.

This type of financing is often needed by individuals or legal entities who need a certain additional amount to build their facilities. This plan is financed by large banks and investment companies whose goal is to increase profits on their shares thanks to this method of lending. Due to the high risk indicator, this financing instrument is not found as often as its “competitors”. Small banks rarely resort to loans of this kind, such as mezzanine ones.

Attention! It is advisable to use meson financing as a form of profitable investment only if you have solid start-up capital. It is most suitable for the activities of large investment companies and banks.

Positive and negative points

Mezzanine real estate financing has a number of disadvantages, namely:

• the project developer assumes the existing risks;
• capital is a fixed structure;
• projects of this type have a very late “exhaust” - long-term investments;
• market risks.

The positive aspects of such financing are:

• simplicity of design;
• it takes little time to issue and receive funds;
• When applying for a loan, no mortgage is required.

Key differences from other forms of financing

This type of financing is radically different from all those considered.

• Source of debt payment: Payments on this loan are made with the money the company received when selling its shares, and not with the money the company received for its services, as is the case with debt financing.
• Source of borrowed funds: funds are received only after a personal conversation with the investor, and not, as in usual cases, through the open market.
• Liquidity indicators: All instruments of this loan are illiquid and cannot be traded on various financial markets.
• Amount of funding: conventional loans have 80% coverage of the entire financing amount, in the case of a mezzanine loan, this figure is 20%.

Each of the 4 types of financing has both its pros and cons. Careful consideration should be given before undertaking one of these fundraising or investment schemes.