With bank interest rates on the rise, as well as the cost of building materials and services, it might seem like the real estate industry is headed for a downturn, but recent observations from Capitalia suggest otherwise. Developers are not only in a hurry to complete the started projects, but are also making plans to start new projects. What are the biggest challenges and trends in real estate development from the lender's point of view?

Despite the price increase.
Almost everyone has felt the rising inflation in recent months, but it has not paralyzed daily activities and spending. A similar observation is in the real estate developer industry. Despite the price increase, developers continue the started projects and fight the price increase in different ways - someone has bought most of the materials on time, while another accepts a lower project profitability than originally planned. Also, during the course of the project, the planned property sales prices are adjusted, taking into account market changes. Alternative financing often helps in solving the price issue, which helps to finance unplanned additional costs during the project.

Growing activity in the region as well.
Since Capitalia started financing development projects in the spring of this year, more and more interest has been received from regional developers in Liepaja, Valmiera region, Salaspils and other cities. For example, in July of this year, Capitalia granted EUR 150,000 in financing to cover additional costs to the real estate developer "Lion estate", which operates on the Liepāja side. On the other hand, in the spring of this year, Capitalia issued a loan for the completion of the "Smailes" project in Valmiera region. Regional projects are often of a smaller size, which accordingly includes less risk both in the construction process and in attracting funding . The proportion of new projects in the region is much lower than in the Riga area. Thus, the demand for apartments in newly built or renovated houses is equally high, which opens up great opportunities for smaller developers in the region as well.

Alternative lenders have their advantages.
Since the geopolitical tensions in Europe, banks' approach to lending has become even more cautious and conservative. In order to receive bank financing for the implementation of a development project, the entrepreneur must ensure his participation in the amount of at least 30-40% of the total amount of the project. In addition, receiving an additional amount to cover unexpected costs is often very difficult or even impossible. Also, banks prefer to develop projects in Riga or its surroundings, while regional projects are considered potentially less liquid and profitable. The approach of alternative financiers is more flexible with lower requirements for the entrepreneur's financial participation and security. Also, financing can be received faster than in commercial banks. In case of unexpected costs, it is possible to more promptly agree on adjustments to the funding amount and receive an additional loan, if necessary. All these aspects result in smoother project execution and timely sale of the object. Although bank interest rates are lower, often the earlier completion of a project can offset the difference in interest costs incurred by using more expensive but faster financing.

You cannot live without your own capital.
It is important that throughout the execution of the project, it is in the lender's interest to maintain a healthy loan-to-value ratio (loan-to-value). This means that developers should also consider investing their own capital in the implementation of the project. It is great if the land property on which the construction works are planned to be carried out is already owned by the entrepreneur, the construction site preparation works have been carried out and all the necessary permits have been received. It is more complicated if an entrepreneur wants to implement a project "from scratch", where a loan is already required for the first step - the purchase of land. Such a project will sooner or later reach the loan-collateral ratio, at which the lender will no longer be ready to provide financing for the continuation of construction work. The recommended own participation is in the amount of 20-30% of the total costs, which not only reassures the lenders, but also provides a small reserve to cover unplanned costs.

Capitalia prefers to finance the final phase of the project
The earlier the project is in the phase, the more risks its realization involves. For example, when starting zero-phase construction works, an entrepreneur may encounter unexpected obstacles in the construction of communications and roads, in the process of coordinating the project and building permit. It is especially risky to attract financing when all the legal and preparatory issues have not yet been resolved. Capitalia recommends attracting financing when all fundamental issues have been resolved and the green light for project implementation has been received. Likewise, the completion of all preparatory work allows the lender to feel more comfortable financing the specific project and provides confidence in the professionalism of the entrepreneur. Capitalia prefers to fund the closing phase of a project when it is confident that the allocated funding is sufficient to complete the project. Also, in the final phase of construction works, there is a much lower risk of encountering unplanned costs and other surprises, since most of the work is already behind us.

„ Despite changes in material prices and the property market, Capitalia gladly engages in real estate development projects, helping to build a housing stock not only in the surroundings of Riga, but also in smaller Latvian cities. Together with our clients, we are very proud of the projects we have financed so far and we are actively looking for opportunities to get involved in the implementation of new projects," admits Artūrs Soročenkovs, head of Capitalia's Financing Department.