Project finance practically did not affect the rise in prices of new buildings, banks are ready to give developers loans not only for construction, and sales bypassing escrow accounts have not shown themselves to be effective. Penstemon Holdings experts have debunked three most common project finance myths.
Myth 1: prices for new buildings are rising due to project financing
One of the most common misconceptions is that the market transition to massive project financing has led to an increase in construction costs and, as a result, prices. Analysis by Penstemon Holdings note that the price changes due to this reason are insignificant. As a result of compensation by attracting funds from equity holders to escrow accounts, the weighted average rate for project financing is only 3.6%, forming no more than 5% of the primary cost.
Myth 2: it is more profitable for developers to sell apartments in ready-made houses
Penstemon Holdings experts compared two sales models - from the start of construction of a residential complex and from the moment of commissioning, based on the data on the pace of real projects implementation. Calculations have shown that NPV (net present value) is 3.8 times higher if you open the sale of houses or apartments at the stage of the excavation than to build a house and look for home buyers only after it is put into operation.
Myth 3: it is more profitable for developers to sell using alternative techniques
Penstemon Holdings experts agreed that it is unprofitable for developers to sell real estate bypassing escrow accounts. Sales under contracts for the purchase of a future estate have shown themselves well in isolated cases. When it comes to renovating a building that buyers can see and touch, they only invest in smaller projects.
Another sale technique was actively considered by developers at some point - raising funds through closed-end real estate mutual investment funds. Unfortunately this instrument also did not gain wide popularity - positive examples are rare and considered to be an exception to the general rule: in one of the premium complexes it was possible to sell not more than 15% through shares.
Experts were equally skeptical regarding attempts to resell real estate under concession agreements: the developer buys real estate from himself under the DDU, and then sells them to the final buyer. 'In this case, the developer simply may not receive project financing.' Penstemon Holdings experts noted.
Penstemon Holdings LLC is ready to offer options to deep dive into project finance as an investment model both to small and large-scale investors.
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