Real estate development projects often require significant financial resources. In this sector, where credit has traditionally been provided by banks, alternative or complementary financing is gaining importance and is seen as a viable solution, especially by small and medium-sized developers.
In the face of tightening credit requirements from traditional banks, exploring alternative financing options may be a viable solution for the development sector.
Alternative sources of finance
Alternative financing for the commercial real estate sector refers to non-conventional sources of financing, other than traditional bank loans, such as private lenders or crowdfunding platforms, among the most relevant.
The use of alternative financing in the early stages of a real estate project complements the developers' own capital and allows them to take advantage of opportunities.
Crowdfunding. Crowdfunding has gained popularity in recent years as a way to raise funds for various projects, including real estate development. Through crowdfunding platforms, developers can present their projects to a wide audience and attract individual investors.
This funding format allows for smaller investments from several individuals, who collectively contribute to the financing of the project. Crowdfunding can provide developers with access to capital and, at the same time, create a community of supporters for their projects.
In any case, when access to more traditional financing becomes difficult, developers can turn to alternative sources of credit, an option they did not have more than a decade ago.
Factors influencing house prices
Funding
Most of the most dynamic urban areas in our country share a common problem: a shortage of housing.
The limited supply of flats and a steady demand are pushing prices up.
In any case, in the current scenario, Gesvalt is not observing a lack of financing for residential development. In fact, banks are showing interest in financing these projects, a situation that has generated competition between entities and, in some cases, advantages for developers seeking more favourable conditions.
In this scenario, affordable housing has a special place. Without a line of loans to public and private developers for affordable or social housing, less viable and with tougher credit conditions, they have an impact on the final housing and its price. Diversifying alternative sources of finance can be a developer's ally in the face of the housing shortage.
Lowering interest rates
The fall in interest rates that is occurring in 2024 reinforces the expectation of a growth in demand for homes for sale and, therefore, in the generation of a shift of interest from the rental market to the purchase market.
This change in interest rates could also motivate developers and builders to develop new residential projects and boost new housing construction.
Price of land
Undoubtedly, the scarcity and price of land is one of the main variables that have an impact on the development project and, therefore, on the value of housing. This situation greatly limits the supply of new housing that can be put on the market.
Mitigating the effect of land prices with measures such as making land use more flexible and facilitating the conversion of tertiary assets into residential ones are some of the essential formulas to alleviate the tension in the residential market and add more housing supply.
What are banks and private financiers looking for when providing financing to developers?
The developer loan is a product designed to finance the construction or rehabilitation of housing. What aspects do banks and financiers review in order to provide financing to developers?
Among the main aspects of evaluation, we highlight the following:
- Check of the holder's credit and payment history. Is the holder free of charges? All information is checked against the system CIRBE to verify the authenticity and consistency of financial data. Proven track record in the market.
- Permits and licences for the construction project approved and validated by the College of Architects of the area where it is to be built.
- Ownership of other assets, such as financial investments or real estate.
It should be borne in mind that the loan holder does not receive the capital all at once, but that the bank delivers it in phases. A central role is played here by the Project Monitoring, a service for the control of the development of a promotion generated by the developer's need for financing.
Financial security
Financial institutions mainly seek security when granting loans to developers. This prudence translates into an exhaustive analysis of the risks and profitability of the projects.
Private funders, on the other hand, place greater emphasis on profitability, and are therefore willing to take on more risk to maximise returns.
Other factors such as:
In the evaluation of real estate projects, banks and private financiers pay special attention to factors such as the location of the project, the developer's track record and experience, whether the land is owned by the developer and whether the developer has all the required licences to meet the project's deadlines.
In addition, among the factors they take into account, they consider the level of pre-commercialisation of the project. It is customary to require that a minimum of 30% or 50% of the total sales have been achieved before granting the necessary financing to start work.
Private funders are looking for:
On the other hand, private investors tend to be more flexible than traditional banking institutions by imposing less stringent requirements on developers, but at the same time, they also set higher returns, which can increase development costs such as house prices.
At the same time, sustainability criteria are becoming increasingly important among the determining factors for the granting of financing to developers. Residential projects that incorporate sustainable features or have certifications will improve perception and become more attractive to both investors and potential buyers.
Sustainable financing
It is not simply about building or rehabilitating properties, but about fostering spaces that enhance both communities and economies. Sustainable financing for the real estate sector are loans that are governed not only by profitability criteria, but also by ESG (environmental, social and corporate governance) criteria.
Green‘ loans are any type of lending instrument that is made available to developers exclusively to finance projects that are documented and accredited as sustainable. Green finance is one of the major formulas for accessing loans.
How does sustainability affect the acquisition of funding?
The real estate sector, especially the segment dealing with residential construction, is responsible for CO2 emissions, so its impact on the environment is a major concern for the sector.
Growing environmental awareness and stricter climate change regulations are accelerating the shift towards a more sustainable housing stock. In this context, sustainability has become a key criterion for obtaining financing for real estate projects.
Real estate developers are aware of this and are prioritising sustainability in their residential projects for several key reasons. Firstly, they are seeking to differentiate themselves in a competitive market. In addition, they are proactively adapting to environmental regulations that are being implemented by leaps and bounds.
Finally, they recognise that more sustainable projects often have access to more favourable financing conditions compared to traditional projects.
Banks are increasingly aware of climate urgency, regulation and government requirements, and this is reflected in the way they are adjusting their funding criteria.
As a result, they increasingly value the sustainable factors when granting any type of financing. Consequently, projects that integrate sustainable features tend to be prioritised over those that do not incorporate ecological considerations.
The banking sector is diversifying its portfolio with environmentally oriented financial products. Green loans and green bonds are being promoted, which aim to financing energy efficiency initiatives, The use of renewable energies, the reduction of carbon emissions, or sustainable construction.
In addition, conditions for accessing finance are becoming more flexible. Banks now offer more attractive rates and extended repayment terms for projects that integrate sustainable features.
It is also becoming an essential element for investors, as they are demanding more requirements and documentation demonstrating the sustainable commitment of projects from the outset.
It is essential to incorporate sustainability criteria from the very beginning of the project, with the purchase of the land, and thus ensure that these principles guide all phases of residential development.
Conclusions on alternative financing
- Caution currently prevails in financing the development sector. Banks are imposing stringent conditions, such as high pre-sales rates and a proven track record from applicants, before approving financing. These conditions make it difficult to access capital for certain projects and increase terms, resulting in a decline in residential supply.
- Alternative financing offers greater flexibility, but this comes with higher interest rates that raise project costs and, consequently, can increase final selling prices.
- In both scenarios, housing costs are affected, although they are not the main driver of recent price increases. Factors such as limited land supply are more important in this dynamic.
- A positive aspect of today's development sector is the diversity of financing options available. With a variety of constraints, developers enjoy greater flexibility to adapt to different market situations.
- Today, sustainability has become a successful lever for securing financing in the real estate sector. Projects that integrate sustainable practices and obtain sustainability certifications often receive more favourable financing conditions. This is because these projects present lower risks and respond to the urgent need to promote a greener and more sustainable built environment.