Project Report on Real Estate for Project Finance. The term real estate is defined as land, which includes the air above and the group below it, and any building or structure thereon, also known as realty. It encompasses residential buildings, commercial offices and theaters, hotels, and restaurants, retail buildings, industrial buildings such as factories and government buildings.
Real estate includes the purchase, sale, and development of land, residential and non-residential buildings. The main players in the real estate market are landlords, developers, builders, real estate agents, tenants, buyers, etc. Real estate sector activities also cover the housing and construction sectors.
The real estate sector in India has assumed increasing importance with the liberalization of the economy. Business opportunities and migration of the labor force have resulted in increased, in turn, increased demand for commercial and housing space, particularly rental housing. Developments in the real estate sector are being affected by the growth of retail, hospitality, and entertainment industries (eg: hotels, resorts, cinema theaters), economies of services, and information technology (IT) enabled services, etc. Is a major employment driver, the second largest employer after agriculture only.
Current State Of Real Estate In India
The real estate sector in India is expected to reach a market size of US $ 1 trillion by 2030, from US $ 120 billion in 2017. India’s real estate market is projected to grow at a CAGR of 19.5% during 2017– 2028. It is estimated to reach US $ 650 billion by 2025, representing 13% of India’s GDP.
The increasing share of real estate in GDP will be supported by increasing industrial activity, improving income levels, and urbanization.
The real sector in India today is witness to widespread changes that slowly but surely hope to make India a preferred destination for real estate activity. The real estate market is opening in India. There are still some hurdles in real estate development such as unclear title, tenancy improvements, and lower property taxes.
Major Factors :
1. The major external factors that people consider when purchasing property are price, loan availability, and proximity to the workplace.
2. The major in-locality factors that people consider when purchasing property are quality of construction, availability of water, and pollution-free environment.
How to prepare a Project Report on Real Estate for Project Finance?
The concept of a project report for a real estate project is slightly different from the DPR (detailed project report) of other regions. In real estate, the project will be executed and sold out in full. Here, a loan is not taken to build an asset but to build inventory that will be sold with the passage of time.
This industry may have peculiar scenarios such as digging the first hole in the land without inventory sales. A soft launch on paper can lead to sales. The sale of apartments or commercial spaces can continue in the leveling of the site and the phases of civil works, while there is no visible construction of a building.
A project report on real estate has to be prepared with a clear mindset of the time of the project. The project is expected to be completed from the time of launch till the completion of the floor wise.
Information required for report preparation
1. Profiles of builders, previous projects, related brands to highlight the builder’s image.
2. Understanding whether the company taking the project is an SPV (Special Purpose Vehicle) or an existing company. The SPV has to be supported by the support of the actual promoters.
3. Technical project report as approved by the architect, including estimates of expenses.
4. A detailed profile of architects because will highlight the expertise used and wins the trust of buyers.
5. Accurate description of the number of towers to be built with multiple floors in each tower, no. Shell space on each floor, the size of such a space.
6. Facility to provide sports areas, gardens, clubs, community halls, etc. to the residents.
7. Options to reach the project site with distance.
8. Distance of major infrastructural establishments from the project site such as airports, railways, educational institutions, workplaces, highways, police/fire departments, hospitals, etc.
9. The management finalized the construction plan and the sale (payment) plan.
10. Detailed pricing scheme which includes basic fees, parking, developmental fees, power backup, lift or similar services, club membership, etc. other charges.
11. Payment plan time
12. Status of clearance from various departments like map approval from city and country planning department, power/water connection, pollution, environment and airport clearance, fire department, mining department approval.
13. Any other information relevant to the project report according to each particular case.
Preparation of Project Report
Developing a project report will involve a smooth flow that will keep the reader interested and relevant to the topic. Any ambiguous information will not indicate the originator’s charity towards the project. Such a perception of vague ideas would make the lender extra cautious in its support of the fund.
The basic parameters are the same as detailed in the detailed project report. However, special mention will be given here:
1. The current scenario of real estate companies and a lack of confidence in buyers due to delivery issues have increased the need to broaden the profile of builders. All previous projects, successful deliveries, ongoing projects, experience in the field, capabilities of the team to be explained.
2. The details about the landowner and the developer, if they vary, should be explained to them. In addition, payments made to obtain development rights and EDC / IDC (External Development / Internal Development Fee) should be mentioned. The advisor must be assured that such payments have been made or agreed to have the stamped consent to the payment method regarding such rights.
3. Special efforts made for this project such as extensive landscaping or special designing techniques such as terrace gardens are to be highlighted.
4. Large-sized projects employ consultants for much of their planning and execution. These can be related to financial advisors, architectural design consultants, electrical/plumbing/fire consultants, HVAC (heating ventilation air conditioning) consultants, etc., detailed mentions about Vastu consultants, and a brief mention about other consultants regarding professional approach. Tells in Project construction.
5. Real estate projects require certain approvals that are necessary to start, build and sell the project. As mentioned above, such approvals should be taken care of by the promoters and the status of all such approvals should be detailed in the DPR.
6. Marketing is a strategy and must be done with the utmost skill and experience. Such techniques are used out of competition, however, marketing spending is a major topic of budget.
7. The current market trend needs to be studied in depth according to the location of the project, the surrounding areas, the state of the infrastructure in the surroundings, customer feedback in the existing projects in the surrounding areas.
The revenue model of the real estate project report begins with the construction of the project and ends with the sale of the entire project. Therefore, the cash flow of the project has the biggest role in understanding the movement of the fund. The key drivers of the financial model need to be brought to the forefront and are relevant to readers:
1. The exact area of the project, the space consumed in the built-up area, the number of towers, the flats/office space, no. On the floor.
2. There is a need to specify the construction cost per square foot as this will ultimately result in fixing the selling price per square foot.
3. The total cost of construction, payments made to purchase development rights, EDC / IDC fees, any other sinking or variable costs are to be included clearly and accurately.
4. Considering the time it takes to place each slab, a monthly construction schedule needs to be fixed, which should coincide with the overall total construction cost.
5. The sales and payment plan determines the funding status and application. This time should be included very accurately in the financial model because the funding and completion of the project depends on the proper funding and application of such funds.
6. Work-in-progress (WIP) should be recognized as close to the actual expected and should be in sync with manufacturing, sales, and carry forward for the following years.
7. The DSCR (debt service coverage ratio) should not be calculated in terms of cash profits. This project requires thorough consideration.
8. Until the sale is booked, the advance received from buyers remains as an obligation to the builder.
9. Like EDC / IDC fees or other payments made to obtain developmental rights, all fad is converted to WIP.
10. The calculation of profit in each year may show a loss initially and some profit in the coming years, however, the total life of the project is to be considered until sold. Whether it is profitable as a whole and the cash flows are sufficient to meet the demand of lenders is more important than the profits of the individual year.
11. It is an understanding in real estate projects, that the borrower’s share to contribute to the financing of the project will not be less than the banker’s share of the financing. However, considering the respective parameters, a slight deviation may be allowed.
Bankers today have reservations in lending to real estate projects. However, good projects and a satisfactory previous track record are still funded. Loan funding becomes problematic even when the actual sale is not taking place. Hence market footing of brand and marketing efforts is also considered by the banker to understand the feasibility of the proposal.
We have brought all of the concerns that are typically exclusive to project reports for real estate, however, we have tried to include aspects that apply to the majority of such project reports. Whatever is added to a particular project has to be dealt with accordingly.
The article is a brief description of what is included in the detailed project report of a real estate project. This includes our various project reports, practical experience when dealing with the bank, and value additions for our readers and customers.