Construction Finance Valuations
In the past we have observed that there has been a decline in absorption rates of residential units in most of the micro markets in India. In lieu of this slowdown there is an increased demand of institutional capital by developers for their proposed or ongoing projects. Developers target is to complete their projects on time but due to the slowdown in sales it gets difficult for a developer to complete the project within the given timelines.
The revenues at times are also diverted to other projects by the developers thus making the project construction slow. Therefore, developers rely on borrowings from the market as the development in the project progresses. The other means of finance is through financial institutions wherein funding is generally provided against the project sales receivables and future unsold inventory in the project. However, fluctuating trends in the markets freeze developer’s funds in the project and in such cases, developers can take up the construction of the ongoing / pending works in the project by availing real estate construction finance.
This project funding is given to a developer subjected to the construction plan timelines of the project and the verified credentials/background of the developer. These project finance or Land Acquisition valuations are done for Developers, Financial Institutions, fund managers, and also highlight them about the project progress, the risks associated along with the micro market overview. We also carry out valuations for Commercial/Retail operating Business that an institution may look at for financing or acquisition.
BOV Value Creation:
- Study of the development in the vicinity of the site and other regional developments (Market Research / competition)
- Work out Financial and Timeline assumptions of the proposed development, i.e. interest rates, discount rates, and timeline assumptions for Sales and Construction.
- Work out future cash flows (inflows and outflows) for the project. These cash flows include Cost of development, professional fees, etc. and likely receivables in the project in terms of existing sales, proposed sales, rent etc.
- Financial modelling so as to carry out ‘DCF’ or “Cost Approach – Residual Method” valuation of the project.
- In special cases, wherever required carry out the valuation of the project from one more approach, i.e. Sales, cost or income and compare valuations around with another valuation to arrive at a final opinion on open market value of the property.