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real estate sector
Capital Markets Board
Sub Prime Mortgage Crisis
Buy to Let Sector
Almost half a decade since the financial crisis started and we all live in a different world. No one has felt the changes more than developers. Developers in the UK, US and many other locations have been hit from all angles:
The financial crisis was triggered by a sub-prime mortgage crash, and one of the immediate consequences was the banks almost completely shut up shop with respect to loans for property investments.
Developers were immediately affected by this. On top of that, the lack of mortgages, combined with the eradication of consumer confidence and rising unemployment led to a severe drop in property purchases. So, not only did developers see their revenue affected by falling sales, but falling sales only served to further lessen their chances of being able to borrow from the banks.
We all know how many developers went out of business because of this, and unfortunately now nearly five years on and bank lending is still in a dire state. Thankfully those developers left standing are predominantly high quality, rock solid companies. For this breed of developer banks are not the only option for raising finance, and these developers, with their new and creative ways of raising finance are becoming instrumental in the recovery now being seen.
In America and the UK, the rental market and buy to let segments are experiencing an unprecedented boom at the moment. Millions of people are still losing their homes to repossession in the US, combining that with the millions of people unable to get mortgages for one reason or another, is piling on to the existing rental market to create massive demand, which is likely to remain high for the next 5-10 years.
Big investors want entire apartment buildings, and to capitalise on this savvy developers are raising finance from the private sector to build rental properties to serve the increasing demand. The UK is seeing the same with developers seeking private sector funding to build rental properties.
In Turkey most of the big developers are now floated on the stock market, and there are dozens of Initial Public Offerings planned for next year.
While data for this year in Turkey is hard to come by, we have a report of the situation at the end of 2010 from Capital Markets Board.
The body said in a report that five IPOs from Turkish REITs had raised 610 million Turkish liras during the year. It also reported that 19 developers were operating in the Istanbul stock exchange, with a total market value of 5.5 billion liras, and a combined portfolio value in excess of 8.2 billion liras.
The report also said that the IPOs account for 36.7% of the total market value, and that the success of their offerings led to investment in the real estate sector doubling compared to last year.
In Abu Dhabi when the government launched Vision 2030, a plan to replace oil with services and tourism as drivers of economic growth, by developing the infrastructure and building attractions - the plan was that most of the funding for the state-backed developers would come from private investors.
Another common method for developers to raise finance is joint ventures. This is particularly true of the resort segments in many countries around the world. Hurghada is a prime example of this.
In Hurghada the property sales market grew hand in hand with the tourism industry. Developers and resort management companies would enter partnerships, whereby the developers would build new developments and sell the properties to investors (off plan and completed) with guaranteed rental management. Both would get a share of the proceeds from the property sales, and both would get a share of the rental fees, which tend to be an agreed percentage of the properties income.
Hurghada was certainly one of the first places where we saw such widespread partnerships between developers and holiday companies, but it was a successful model that quickly spread. Now such partnerships are in operation in most popular tourist locations around the world, including in the leaseback segment of France, the Caribbean and places like Cape Verde. The deals are particularly well structured to attract SIPP investors, who tend to go for guaranteed rental agreements.
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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.