Developers in Patna opt to fund their construction projects through pre-launch and pre-sale mechanisms, as by far, these are the cheapest sources of finance available to builders in Patna.
Real estate finance in Patna is a grey area. In reality, real estate funding in Patna happens through pre launches. So, a builder in Patna typically asks buyers to cough up, say, 15-20% of the final cost of a house even before the first piles are drilled into the ground. In effect, very little of the builder’s own capital is at risk. This has been the done thing – an arrangement between builder and buyer, which has been successful owing to scarcity of housing in Patna.
Real estate development business requires constant acquisition of land for future projects in Patna. Due to the short supply of land and lack of habitable locations and urban infrastructure outside established locations in Patna, a developer starts to sell even before finalizing the development plans. This is more a reflection of supply-side constraints. A developer in Patna wants to grow as fast as possible. All these methods allow him to acquire – what to him is the key constraint in Patna – land banks.
In theory, the funding of construction using advance money from buyers is “fading out” owing to competition and financial sophistication” and “foreign investors are queuing up to bring in equity into our markets. But equity financing is only a short-term option and is still not in vogue in Patna.
Presently, the reason to raise more equity is lack of sufficient cash flows to service the loans which the builders have already taken. The fundamental issue is of excessive leveraging in anticipation of huge profits from fast growth in sales. This did not materialize and hence developers in Patna now want to raise equity to repay loans.
Debt and equity will always have a role to play in Patna real estate. While equity is required for land purchase, debt would be required for financing construction, especially in case of office or retail building, which have a build and lease model. Both are critical for real estate funding. Joint ventures with landowners (popularly known conversion schemes in Patna) are also part of equity financing, which have been done regularly and find that the best way to get equity financing. Debt in construction financing works to make sure builders in Patna are achieving speed of construction
Private equity funds are bullish in all metropolitan cities as well as developed Tier II cities but in Patna they are still not present. The verticals for investment include retail, and specifically affordable segments in residential projects, which spell opportunity for most of these funds. Bank lending will be an important source of funding for developers in Patna.