Among the various sources of funding for a project that a real estate developer, for instance, can pursue, equity and debt stand out. There are other sources, including joint ventures and crowdfunding.
Equity funding involves raising capital by selling ownership stakes, or equity shares, in a real estate project to investors or partners in exchange for contributions. This can include individual investors, private equity firms, or real estate investment trusts (REITs).
Debt funding, on the other hand, involves borrowing funds from lenders or financial institutions, typically secured by the property itself or other collateral. Common forms of debt funding include mortgages, construction loans, and commercial real estate loans.
While these two are good funding sources, operators in the real estate sector say debt is a better option, citing off-plan sales of housing units in real estate projects, which they consider a common form of equity funding.
Samuel Ajose, chairman/CEO of Levitikal Group, is among the investors who argue that debt is a better and safer funding option for real estate projects.
Ajose, who invests in housing development through Levitikal Real Estate and Construction, a subsidiary of the Levitikal Group, explained to BusinessDay in an interview why debt is better, noting that whichever option works for a developer depends on what he wants to do.
“We have different types of businesses and investments that attract different types of funding. Sometimes, when you are entering construction, you may want to build houses, but it’s cheaper for you to finance them,” he said.
He noted that off-plan sales are a funding option that a good number of developers and investors are into, stressing that these sales explain why equity is not a better option.
By the time a developer gathers all his money off-plan, he will be making, maybe N1.5 billion as profit. Now, he has planned all his transactions off-plan on a N9 billion or N10 billion revenue generation, and he may have started when cement was selling for, say, N7,500.
As he progresses with construction, something goes wrong and cement price goes up to N14,000. Just imagine the difference between N7,500 and N14,000? In that kind of situation, the developer will be stuck because the total revenue that he is expecting is not more than N10 billion, yet the cost of construction has now gotten to N15 or N16 billion,” he stated.
According to him, in that situation, the developer will be confronted with challenges, as someone who had bought a property from him at N300 million may not be ready to listen to excuses.
“It may be easier to meet that person and say, please, can you add N10 million? The buyer may struggle to agree or come halfway to pay. But if he tells the buyer that the value of the property is now N500 million, it becomes a problem,” Ajose explained.
He pointed out that, most times, equity funding has put real estate developers into trouble, which is why a lot of projects are abandoned, adding that if you take a developer to court for defaulting in delivery timeline, he will go and show evidence of what he has done with your money and what has changed.
With debt funding, he explained, even though it comes at a high cost, if inflation, for instance, affects the project, the value will go up, such that “a project that you will have sold at N300 million, upon completion, there will have been interest rate that has gone in and when you want to sell, you will have the chance to be able to sell at today’s price.
“This is why we advise people to go for debt for their projects. Equity sometimes does not work, because when you go for it, you shall have signed a contract based on that day and in that contract, you have no opportunity to make an amendment. So, debt is better,” he assured
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
