SOURCES AND STRUCTURES IN DEVELOPMENT FINANCE

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DETAILED ANALYTICAL REVIEW WITH INSIGHT FROM MAJOR DEVELOPERS

Prepared by

Sources and structures in development finance

By Albert Enikeev

RICS Registered Valuer, MSc Property Finance, MBA, MRICS

CEO of Properties JOINTLY Group

DETAILED ANALYTICAL REVIEW WITH INSIGHT FROM MAJOR DEVELOPERS

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Foreword from Albert Enikeev, Group CEO

What do investors look for when they consider buying real estate assets instead of other alternative investment assets? Some look for "certainty" of profits with "certain" performance returns and, more importantly, for a "certain" period of time to enjoy receiving that predictable and stable income, both during the project time and/or at the end of it. For these investors, Property Investment (i.e. Income-Producing) projects which provide immediate income and secure letting for a fixed period. The interest is saleable. Other investors seek a higher risk investment, with less certainty but the potential for significantly higher returns. For these, there are Property Development projects, which are riskier than Property Income-Producing projects but can offer increased returns if the property lets quickly on good covenant terms. Each activity is separately characterized by its own pattern where cost overrun or delay in receipt of income and capital contributions affects short term performance and cash flow. When an investor starts analysing why to choose real estate assets (and not other investment assets) and also comparing, for example, London with other areas, then one will see that no other region provides such competitive advantages as London as a global megapolis.

London based real estate group, PROPERTIES JOINTLY, would put in action the above return and period "certainties" and would like to propose setting up and managing joint projects to capitalise on property development and investment opportunities in the commercial and residential real estate markets. Global investors are always keen to gain exposure to the combination of added value of development and investment opportunities including rental income and capital growth offered by property face limited options, as sourcing and managing quality assets in property markets where competition is fierce requires specialist knowledge and experience. Hence, that is the reason why this thorough analytical review with practical outcomes about sources and structures in development finance has been written as a preliminary step forward and knowledge point.

PROPERTIES JOINTLY has noted a number of joint venture opportunities at attractive prices that have the potential for significant value increase over time. Our group as a Developer, Investor and Operator is convinced that the time is right to take advantage of the current market

conditions. While there is no guarantee of achieving any particular return, the group believes that its professional experience in the property market as RICS registered valuers, qualified and certified chartered surveyors, combined with the increasingly attractive pricing of real estate assets and opportunities can result in risk averse / opportunistic balanced returns for our partners.

Based on this detailed analytical review PROPERTIES JOINTLY is ready to implement income- producing and property development structures specifically designed to cater to the astute investment partners who requires control over their investment.

Joining our projects will offer investment partners the options to

• access a medium-large, existing and identified mixed-use property in a core location; • understand the proposed strategy of value creation; and • explore returns that provide attractive diversification benefits away from other asset classes.

In summary, Real Estate business has been and will always be a numbers game of strong underlying assets. Undoubtedly, the value of commercial, residential and development property is a key factor to see if any deal is worthy to proceed. As a professional licensed valuer and a Group CEO, I am happy to share our sources and structures, valuation deal analyses and then you can decide if the business plans are feasible. You are welcome to join our Group, which has already shaped and started its pathway. Properties JOINTLY Group is all about getting involved in real estate projects with the right partners and sharing rewards together.

Albert Enikeev CEO of Properties JOINTLY Group RICS Registered Valuer, MSc Property Finance, MBA, MRICS

Acknowledgements

The special thanks go to the fund and trust management, investment, property development and house-building organisations who provided vital information and to those who agreed to interviews and provided an insight into sensitive subjects such as capital strategy and operations and sources of finance and funding structure as follows:

• The PLC • PLC • Imperium Trust Company Limited • Inland Homes PLC • Land Securities Group PLC • London Wall LLP • Stanhope Group Holdings Limited • St. Modwen Properties PLC • PLC • Urban & Civic PLC • Wates Group

Introduction

The growing number, calibre, type and internationally-multifunctional facets of property development finance sources and structures of property investment schemes have been diversified recently in various directions, locations and sectors both residential and commercial. The complexity of real estate modern deals, funding and mezzanine structures, international transactions and raising capital which have been sourced and structured through property development finance and various specialist vehicles in addition to traditional debt finance have broadened and become more challenging for all market players, including property companies, potential landlords, all sorts of domestic and overseas investors and private wealthy individuals. Among major challenges for real estate stakeholders remains effective sources of property development financing and investment structuring, return on equity and increase to shareholders’ value, taxation and risks involved on the whole supply-chain from initial development appraisal and property development with possible subsequent property management to monetising core assets and recycling capital elsewhere in the business.

There are sheer differences of financial sources, mechanisms and schemes geared to property development finance and investment structures. The current paperwork will analyse and downsize the observation of sources from equity and debt towards structures of joint ventures, partnerships and unauthorised small private equity funds which are actively managed via onshore and offshore investment vehicles. Such small fund management structures usually and in many cases exclusively invest in properties that are not either publicly listed or traded.

The partnership subject discussed here is about the majority of private equity funds, which are quite specific with regard to residential or commercial sectors, size and location-wise, and how that private equity can assist in overall property finance, securing the rest of the needed debt.

Sources and structures in development finance

Table of Contents Page No

Foreword from Albert Enikeev, Group CEO

Acknowledgements

Introduction

Aim and Objectives 1

Literature Review 3 Funding within the property development process and its current state 3 Funding sources for development finance and property lenders 6 Funding categories in property development 7 Funding structures in development finance 9

Research Design and Methodology 16

Findings 21 Project Finance 23 Corporate Finance 26 Debt Finance 28 Senior Debt 30 Mezzanine Debt 31 Equity Finance 33 Special Purpose Vehicle Funding Combinations 45 Offshore Funding Holding Vehicles 51 Real Estate Private Equity Funding 55

Summary of Interviews and Findings 61

Reflective Commentary: Conclusions and Recommendations 70

References 80

Appendix A – Glossary of Terms 86

Appendix B – Abbreviations 91

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