The real estate development in Malaysia is supported by two crucial finance; i.e. Bridging Finance and End Finance. Bridging finance is a loan amount provided to the developer on top of any other loan obtained for the project. It is usually given as a short period with higher interest rate subject to security provided, and usually provided after the planning approval or at the end of the completion of the construction works of the project. Bridging finance is available in various forms; i.e. ‘term loan’ with a fixed repayment period, overdraft facility or a combination of both and can be arranged in the form of direct loans or “Syndication’ loan (indirect). Direct loan is provided by lenders direct to the borrowers without the involvement of third parties and the loan amount from the bank/financial institution is smaller with a lower risk. The indirect loan however, is obtainable when a group of commercial and investment bankers each agrees to give an advance portion of funding. It is usually provided for large scale project which needs ‘large-scale financing’. Traditionally, the financing is arranged by a single bank at a narrow interest rate spreads over the lender’s cost of fund. The differences between these two loans are the amount provided and the documentation. End financing is a loan provided for the purpose of purchasing a property. Given usually after the Bridging Finance, its monthly repayment includes interest and principal payments based on the annual interest rate. This type of financing helps the potential buyers to pay the developer when the property units are still under construction.
The importance of these two financings for two types of development; i.e. Sell Then Build (STB) and Build Then Sell (BTS) can be illustrated as below:- STB
POSITIVE CASH FLOW
Brief explanation on the graph for the two types of financing and development types; i.e. Sell Then Build (STB) and Build Then Sell (BTS) are as follows:- Sell Then Build (STB):-
(a) Is the point/time when the development components are launched for sale to generate income/revenue.
(b) Indicates the blue line which is the income stream or the revenue generated from the sale of the development components over time.
(c) Is the actual total cost involved or spent to develop the project which is partially financed through bridging finance.
(d) Indicates the cost incurred to develop the project over time.
(e) Indicates the red line which shows the net cash flow of the project (revenue after deducting the cost) which usually will be negative and then achieves a breakeven point where the development cost is covered and then continues to be positive thereafter.
(f) Is the point where peak borrowing is required to cover the development cost due to the reason that that is the period which the project experiences a negative cash flow (revenue obtained is fully spent to cover the cost and additional fund is required to cover the cost).
(g) Is the breakeven point where the revenue has covered the total cost involved in developing the project and now it is the time to start paying back the loan amount provided through bridging finance using the revenue received thereafter.
Build Then Sell (BTS):-
For Build Then Sell development type, explanations on the graph above are all same except for the following:- i) The Income Stream indicated by green-dashed line which shows that for this type of development revenue is only generated after the project is completed.
ii) Indicates the point where peak borrowing is required to fully cover the development cost since this type of build then sell development has no revenue to cover the development cost (sometimes partially depending on the availability of internal fund of the developer). As such, it needs the bridging finance to cover the...
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