Property Economics and Finance

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PROPERTY ECONOMICS AND FINANCE
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Table of Contents
Sources and Types of Finance.................................................................................................2
Financing Techniques..............................................................................................................3
Evaluation Techniques.............................................................................................................3
Risk and Risk Management....................................................................................................4
Property economics overall view............................................................................................5
References.................................................................................................................................6

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Sources and Types of Finance
The developer within the property industry has to identify and evaluate the various
alternatives of financing before selecting the best one. Most of the developers first go for
personal savings as source of funds. In addition, they also rely on different banks and life
insurance companies for funding as its primary source. However, globalization has led other
sources like private funders and joint ventures to emerge as an alternative for many
developers. Moreover, they can also get advances from third parties as lease and
securitisation (SPVs). Further, they get the funds from mortgage brokers and mortgage
bankers for re-mortgaging as they have proficiency and understanding in property industry.
Other main sources include pension funds, auction finance and bridging finance, real estate
investment trusts, corporate finance and state finance programs (Berry et al., 2013).
The capital structure in property industry helps to know the quantum of equity and
debt in financing property and further expansion. Further, this also helps in to compute the
firm’s leverage (Migl, 2016). In this industry developer majorly uses debt for financing so the
company has a high leverage. However, it plays a crucial role in period of bankruptcy also. It
is important for a developer to focus on capital structure as helps to maximize the market
value of the firm which in turn increase the share price and dividends, minimizes the cost of
financing, recognize better investment opportunities for growth of the company and the
industry (Trisha, 2018).
The main capital structuring issue that are relevant to investor returns is considering
cost of capital which should be lower than expected returns. In addition to this, a tax
deduction in debt financing decreases the cost of debt and increases the possibility of returns
and dividends. Further, a high tax rate increases the proportion of debt in financing, but
increase the risk of bankruptcy. The concept of window of opportunity is also a major issue

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as it states the time when the funds are available at a lower cost considering the economy
conditions. Further, the restrictions on management and its style adopted as aggressive or
conservative is also a major issue affecting the investor’s return. The growth rate of the
company can finance its capital from debt easily increasing the business risk of the company
(Lumen, 2018).
Financing Techniques
The various risk faced by the financiers in the project finance are identified as
controllable or uncontrollable risks. Construction and completion risk is crucial to lenders as
they need to mitigate it by commodity derivatives if the completion costs increases.
Operating risk is faced when the cost of operations goes up and these can be mitigated
through future contracts, lump sum payments, turnkey contracts and warranty agreements.
Force majeure and change in law is a major risk for lenders so they need to regularly review
it. Further, political and regulatory risks are uncontrollable risk so lenders should be ready to
face this risk. This risk can be reduced through insurance. Repayment risk is the most
important risk to lenders and it is managed through Project Company itself by maintaining
reserve accounts and evaluating potential ratios. Currency exchange risk and interest rate risk
are some other risks that lenders have to deal with. To reduce it to the lowest level they use
the method of swapping with a different market financier (World Bank Group, 2018).
Further, the risk between parties is shared considering that which party can control the risk
efficiently and effectively. The party which can control the risk should tolerate it. However, if
none of the parties can control it than the party which can tolerate it easily should take efforts
to do so.
Evaluation Techniques
Computation of Net Present Values-