The benefits of the various types of corporate and project-based funding are determined by the size of the property company looking of funding, whether it is listed on the stock exchange, and whether it is a property investor or a property trader.
The structure and the extension of the modern economic activities have created the need of funding in order for a designed plan to be completed. In many cases, the cost of the whole effort can be covered without the participation of external funds. But it has been noticed that when the specific activity involves a high level of expenses, the only solution seems to be one of the many funding schemes that have prepared by the banks (or other financial institutions and large corporations) especially for that purpose. Today, one of the most important areas that show a great interest of funding is the property investment.
According to the above, the financial organizations and the other types of corporations, have the leading role in funding the activities that are related with the property investment (when an interest for funding has been expressed by the company/person that is willing to proceed to a specific investment). The whole procedure of the funding is designed in accordance with the principles and the features of the corporate finance with the participation of a rather recently recognized form of financial structure, the project finance.
Although it is rather difficult to describe the nature and the objectives of the corporate finance using a series of words, we could define it as ‘the study of decisions that every firm has to make. The term ‘firm' here is used to describe a business of any size and activity' (Damodaran, A., 2001, 3). Towards this direction, the financial management team has as its main task to design, organize and supervise all the corporation's strategic plans so that the aims and the objectives of the latter would be achieved. The most secure route for the above task to be completed is through ‘the involvement in investment and financing decisions, the dealing with the financial markets and the forecasting, coordinating and controlling cash flows' (Pike, R., Neale, B., 1999, 27).
The general characteristics of the corporate finance, as they described above, define the area in which this ‘financial mechanism' can be applied. However, there are activities that due to their nature need a more detailed and direct response to the difficulties and the needs that are usually appeared during their realization. In order to cover this ‘gap', the financial theory and practice created the ‘project finance' which is related more with a specific plan of action and not with the whole financial strategy of a company. Damodaran, A. (2001, 228) stated that ‘a project include any proposal that will result in the use of a firm's scarce resources'. If we want to give a definition of the project finance, we could describe it as ‘the legal and financial research and design that aims to the funding of a contractual work'. Today the project finance activity is in a very high level with signs of more growth and development. The most successful arrangers in the areas of project funding are the banks as well as other types of financial institutions. The sectors in which these projects are structured and operate are usually the Power, the Oil & Gas, the Transportation and the Telecom market (see also Platt, 2005, 12-13 and 2004, 36-37). In order for the investors (companies and individuals) to be protected, a set of guidelines has been introduced for assessing and managing environmental and social risks in project financing. These guidelines are known as the Equator Principles (EPs) and the compliance to them is only voluntary (at least for the moment). The number of the banks and the other financial institutions that have signed these guidelines is still very limited (Hawser, A. 2004, 17). The most ‘suitable' area for the application of the project finance – due to its enormous funding capacity - seems to be the capital markets (Asset Securitization Report, 2004, 3).
Generally, we could say that the project finance is a sub-category of the corporate finance, which refers to the financial decisions and actions of the company as an entity whereas the project finance refers to the above decisions and actions of the company that are connected with the funding and the following completion of a specific project (usually of a high value).
As for the structure and the operation of the property companies in the UK, we cannot say that there is a specific image, mostly because these companies do not have a particular legal form but are usually public companies, which can be divided in two categories: ‘a) the property investment companies, which acquire or develop properties and then retain them (they invest in income-producing companies) and b) the developers-traders, who construct or acquire properties and then sell them' (Hoesli, M., Macgregor, B.D., 2000, 232)'
According to Pike R. and Neale B. (1999, 490-91), in order to raise funds, a company has usually the following options:
a) to ‘use the company's cash flow' (this option has to ‘be considered under the term of the profitability of the company and the dividend policy that this company has adopted'), or
b) to raise funds via the capital market – external financing (‘by issuing ordinary shares and fixed-interest securities – debentures and preference shares' –, this type of raising funds i.e. using the New Issue Market (NIM) ‘provides only marginal finance, and is usually used when the stock market is in a high level'), or
c) to proceed to a borrowing from a bank (which is considered as ‘volatile and most characterized by actions related with ‘buffer' finance' – when interest rates are low the companies tend to use the bank as a borrowing tool and when the interest rates become high they tend to repay the debt as soon as possible'. As for the borrowing facilities that are offered from the banks, there is a variety of products that guarantee the cover of the company's needs. We can mention as an example: the overdrafts (which cannot have any use in the property investment area which is the subject of this essay), the term loans (which are the loans with a period for repayment more than a year), which can be short or long term (see also Griffiths, A., 2001, ‘p. 214-218). Damodaran A. (2001, 489) presents an extra borrowing facility that is offered from the banks, the line of credit (the firm has access to the funds at the time and to the limit it is considered as necessary by the firm itself). The most important choice – regarding the property investment – for a firm seems to be the following (Damodaran, A., 2001, 491): ‘a) the unsecured bonds (known as ‘debentures' if they have a maturity greater than 15 years and ‘notes' if they have a maturity less than 15 years) which are backed not by specific assets of the firm but by its general credit and b) the secured debt options like: 1. the mortgage bond (which is secured with real property, such as land or buildings and 2. the collateral bond, which is secured with marketable securities'.
Parker R.H. (1994, 89) states that the most important source of funds seems to be: ‘a) the ordinary shareholders (through the issue of new shares) and b) the loans. The preference shares and the minority interests are considered as less important'.
Although the publicly traded firms have a lot of options regarding the raising of funds, ‘a private firm is restricted to its access to external financing, both for debt and for equity' (Damodaran A., 2001, 520). As Damodaran suggests, the best solution for the private firm seems to be the venture capital, either the seed-money venture (for firms that want to test a concept) or the start-up venture capital, which is preferable for the firms that have an established concept (this could be useful in the area of property market). In the above scheme the ‘venture capitalist provides equity financing to small and often risky business in return for a share in ownership of the firm'. The use of the venture capital as a method to achieve funding belongs to the equity financing options that are offered (usually) to small firms when the latter need money to invest to a product or an idea or to make the transition to publicly traded firms. In order to achieve these goals, the small firms – except from the solution of the venture capital – have also the option to raise equity financing from private investors' (Damodaran, A, 2001, 484). The small firms – and the property trader of the question – have also the option to proceed to a bank-borrowing scheme (either a secured or an unsecured loan) in order to achieve the desirable funding.
As for the individual investor, he can participate in the property investment market either by borrowing money (to invest in property development) or by lending money to property developer. The options available are (Hoesli, M., McGregor, B., 2000, 241, 245): ‘a) indirect equity investments (investments in other company shares, in other collective equity investment vehicles and securitisation of single assets), b) debt instruments (loan under a mortgage agreement) – here we should mention the existence of resource loan (with security on the property and the borrower's assets), of non-resource loan (with security just on the property) and the fixed and variable rate mortgage, c) the property derivatives (contracts whose payoffs depend on the price of some underlying asset)'.
Comparing the methods used by the investors in order to achieve funding for property investment, a research showed that the bank loans are the most significant source of debt finance for all types of property investors and developers, others than the institutions (Maguire, D., Axcell, A., 1994, 37).
When deciding to proceed to a funding of a property investor (a company or an individual) the lender has to ensure that all the necessary information about the borrower and the desired investment has been delivered to him. Apart from this, a property investment analysis is necessary in order to confirm the current situation of the market and of the individual property (see also Hargitay, S., E., Ming Yu S., 1993, 247). When dealing with international transactions, ‘it's really vital to identify risks early in the process'. A series of complications (e.g. ‘difficulty to predict future cash flows or establish an accurate discount rate') ‘can make valuing an international project finance transaction a difficult task' (Deady, D., 2005, 24)
The property market consists (with no doubt) one of the vital areas for all the modern economies and an option for investment even for institutions that hold very important portfolios (of ‘state' character we could say) like the pension funds (see also Booth, P., Matysiak, G., 1996, p. 23-37, and Euro Property, 2004, p.16) giving the option at the same time to invest in properties that present a ‘particular' interest (Gower, S., Harris, F., 1995, p. 24-37). However, when coming to the funding decision, the institution or the company that will provide the funds has to consider all the parameters of its action in order to avoid a possible loss. The speed and the volume of the transactions in the area or property market create the need for direct responses but, on the other hand, the need for stability and security in the financial sector impose the detailed examination and analysis of the parties involved.
Asset Securitization Report, ‘The push for project finance CDO's', October 2004, vol. 4, issue 19, p.3
Berry, J., McGreal, S., Sieracki, K., Sotelo, R., (1999), ‘An assessment of property investment vehicles with particular reference to German funds', Journal of Property Investment and Finance, vol. 17, no 5, p. 430-443
Booth, P., Matysiak, G., (1996), ‘Commercial Property Investment and the Pensions Act 1995', Journal of Property Finance, vol. 7, no 3, p. 23-37
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Estates Gazette, ‘Finance', 10/16/2004, issue 442, p. 51
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Gower, S., Harris, F., (1995), ‘Evaluating British science parks as property investment opportunities', Journal of Property Valuation & Investment, vol. 14, no. 2, p. 24-37
Griffiths, A., (2001), ‘Pricing of risk and the cost of money: How banks are pricing property funding', Briefings in Real Estate Finance, vol. 1, no 3, p. 214-218
Hargitay S.E., Yu M.S., (1993), Property Investment Decisions – A quantitative approach
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Hoesli, M., Macgregor, B. D., (2000), Property Investment – Principles and Practice of Portfolio Management
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Multi-Housing News, ‘Finance', Feb 2005, vol. 40, issue 2
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Napoliello, M., Moskowitz, J., (2005), ‘Lending versus borrowing: where's the real profit in real estate?', Real Estate Finance, February 2005
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Reynolds, P., Mangan, J., Wyld, J., Heath, G., Wilson B., Bower, P., (1998), ‘Local authority property management and the maintenance of heritage', Property Management, vol. 16, no 4, p. 214-221
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