How to finance real estate development?

In order to complete/finance a real estate project, developers must find the necessary funds quickly and in sufficient quantity. How do you do this? Here's an overview.

Real estate development is a professional activity that consists of buying a building lot to build or renovate a building (building or house), and then reselling it as a whole or in pieces (lot by lot). This activity requires to continuously find sources of financing to fund the time gap between :

1. The purchase of the land or the building as well as the works, but also the fees of the engineering and project management offices, the price of the insurance, the cost of the marketing operation, the taxes, etc.
2. Resale at the end of the project.

In order to raise the necessary funds for his project, the developer has different options: use his capital, borrow from the bank, pre-market the homes with VEFA installments... or resort to real estate crowdfunding. Zoom in on these different options, which are often complementary.

Equity or capital: the sinews of war

It is the money that the promoter holds in the treasury of his company. He is forced to use it because the bank requires him to have 10 to 30% of equity to grant him a loan. During the whole duration of the project, this money is immobilized. The developer cannot touch it until he has repaid his loan. Since the financial crisis of 2008, banks have become more cautious, which explains the gradual increase in the amount of equity required.

Bank credit and leverage

In view of the sums involved - sometimes several million - a bank loan is an inexpensive source of financing but often quite restrictive for the developer. Bank debt allows the developer to raise the funds he needs to complete his operation, and to benefit from a leverage effect (a mechanism that consists of maximizing the return on the developer's equity), as long as the cost of the loan is lower than the profitability of the operation.

VEFA or sales in the future state of completion

Most real estate development projects today are carried out in VEFAcommonly known as "off-plan sales". Even before construction begins, the future homes are offered for sale. Buyers must then pay up to 5% of the purchase price as a deposit, then 25% when construction begins and so on until the last payment is made when the keys are handed over, which is often 5%. Here again, the developer will collect the money from the VEFA as the construction progresses and the banks release the real estate loans. These pre-sales are therefore a good way to finance yourself at a lower cost because, instead of taking out a larger loan and receiving the fruits of its sales at the end of the project, the developer collects them during the project.

A new option: real estate crowdfunding

Quite recent, this method of financing allows promoters to build up equity or more precisely "quasi-equity" by collecting it from investors (individuals or professionals) via a crowdfunding platform. For investors, it is a way to lend sums starting from 1 000€, over short periods and at a rate often between 7 and 12%.

For the promoter, it is money available quickly, which is not tied up and which allows him to bring the part of the equity necessary to release the bank loan. For the developer it is much more interesting to borrow with these rates than to have to sell the capital of his company to investors to finance himself. Thus, he can develop more projects and increase the size of his company by growing faster. This explains the considerable success of this new method of financing because everyone benefits from it.

To finance a real estate project, developers generally combine different sources of financing. Real estate crowdfunding appears to be an interesting option that facilitates access to bank loans while reducing tied-up equity. Thus, the promoter can conserve cash and commit to a greater number of projects and thus make his business grow, by relying on the leverage effect.