The concept of Project Report for Real Estate project is slightly different from DPR (Detailed Project Report) of other sectors. In Real Estate, the project will be executed and will be completely sold. Here, loan is not taken to build up an asset, but for constructing inventory which will be sold as time passes by.
There can be peculiar scenarios in this industry like selling of inventory without even digging the first hole in the land. A soft launch on paper may result into sales. Sales of apartment or commercial spaces may continue at stages of site levelling and civil work, whereas there is no visible construction of building.
A Project Report on Real Estate has to be prepared with a clear mindset of timing of the project. Right from the time of Launch of Project till floor wise completion to each sale expected.
Information required from client
- Profile of Builders, past projects delivered, associated brands for highlighting image of builder.
- Understanding whether the company taking up the project is an SPV (Special Purpose Vehicle) or in the existing company. SPV is to be supported by the backing of actual promoters.
- Technical Project Report as approved by Architects including estimate of expenditure to be done.
- Detailed profile of Architects as it will highlight the expertise used and wins the trust of buyers.
- Exact details of number of towers to be built, with number of floors in each tower, no. of shell spaces on each floor, size of such spaces.
- Facilities to be provided to residents like sports area, garden, club, community hall etc.
- Options for accessing the project site along with distance.
- Distance to major infrastructural establishments from the project site like Airport, Railways, Educational Institution, work places, highways, Police/fire department, hospitals etc.
- Management finalised Construction plan and Sales (payment) Plan
- Detailed pricing plan which includes Basic Price, other charges like parking, developmental charges, power backup, lift or similar services, club membership etc.
- Timing of payments plan
- Status of clearances from various departments like map approval from town & country planning department, Power/ Water connection, Pollution, Environment & Airport clearance, fire department, Mining department approval.
- Any other information relevant for project report according to each particular case.
Developing Project Report
Developing Project Report will involve a smooth flow which will keep the reader interested and relevant to the subject. Any vague information will create impression of non-clarity of promoter towards the project. Such impression of unclear thoughts will make the lender extra cautious in extending fund support.
Basic parameters remain same as detailed in Detailed Project Report. However, special mentions will be covered here:
- The present scenario of Real Estate Companies and lack of trust in buyers because of delivery issues has raised the requirement of detailing profile of builders. All past projects, successful deliveries, on-going projects, experience in the field, team capabilities to be explained.
- Details about the landowner and developer, if they are different, to be explained. Also payment made towards acquiring development rights and EDC/ IDC (External Development / Internal Development Charges) to be mentioned. The consultant must be assured that such payments have been made or agreed on stamped agreement for payment method regarding such rights.
- Special efforts made for the project like extensive landscaping or special designing technique like terrace gardens to be highlighted.
- Big sized projects hire consultants for most of their planning and execution. These can be related to financial consultants, Architectural design consultants, Electrical/ Plumbing/ fire consultants, HVAC (Heating Ventilation Air Conditioning) consultants etc. A detailed mention about Architectural consultant and a brief mention about other consultants bring out the professional approach towards the project construction.
- Real Estate projects require certain approvals which are imperative for starting, building and selling the project. Such approvals as mentioned above are to be taken care-of by the promoters and status of all of such approvals to be detailed in DPR.
- Marketing is a strategy and should be done with utmost skill and experience. Such techniques to be used which rule out the competition, however, the expense on marketing is a major subject of budgeting.
- Present market trend needs to be deeply studied according to location of the project, nearby areas, condition of infrastructure in the surroundings, customer response in existing projects in surrounding areas.
Financial Model of Real Estate project report starts from building up of the project and ends with selling of the whole project. Hence, Cash Flows of the project plays top role in understanding the fund movement. Key drivers of Financial Model that needs to be brought to the forefront and are relevant to the readers include:
- Exact area of the project, space consumed in built-up area, number of Towers, Flats/ office space, no. of floors.
- Construction cost per square feet needs to be specified as this will ultimately result in deciding selling price per square feet.
- Total cost of construction, payment made for purchasing development rights, EDC/IDC charges, any other sunk or variable costs are to be clearly and accurately incorporated.
- Considering the time taken in putting up each slab, the monthly construction schedule needs to be decided which as a whole should match with the total construction cost.
- Sales and Payment plan determine the positioning and application of funds. This timing is to be included in the Financial Model very precisely as funding and resultant completion of project depends upon proper receipt and application of such funds.
- Work-in-Progress (WIP) is to be recognised as close to actual expected and should be in sync with completion of construction, sales and carry forward to next years.
- DSCR (Debt Service Coverage Ratio) is not to be calculated as per Cash Profits. Inflows for the project as a whole needs to be considered.
- Until Sales are booked, the advances received from buyers remain as a liability for the builder.
- All the Sunk costs like EDC/ IDC charges or other payments made for acquiring developmental rights are converted to WIP.
- The calculation of Profits in each year might show losses in the beginning and some profits in the years to come, however, the total life of the project until sold is to be considered. Whether it is profitable as a whole and cash flows are sufficient enough to cater to the demand of lenders are more important than individual year profits.
- It is an understanding in real estate projects, that the borrower’s share of contribution to project funding won’t be less than banker’s share of funding. However slight deviations might be allowed from this considering relevant parameters.
Bankers today have reservation in lending to Real Estate Projects. However, good projects and satisfactory previous track record are still funded. Loan Funding, even then becomes problematic if actual sales are not happening. Hence, the market footing of the brand and marketing efforts are also considered by the Banker to understand feasibility of the proposal.
We have brought about all the concerns which are generally particular to the project report for Real Estate, however, we have tried to include aspects which applies to majority of such Project Reports. Anything which is additional to a particular project is to be dealt accordingly.
Note: The blog is a brief of what is involved in a Detailed Project Report of a Real Estate Project. It includes excerpts from our various project reports, practical experiences while dealing with Banks and value addition for our readers & clients.
The above article has been authored by CA Anuj Aggarwal who is reachable at [email protected]