Acknowledgement

I would like to express our sincere gratitude to our lecture Dr. K.A.K Devapriya and our assistant lecturers Ms. H. Chandanie and Ms. N.D Abeysinghe. Their guidance and direction has being a great help for us to finish this report successfully. We also would like to thank the staff at the library and computer lab for helping us with the collection of information needed for this report and all others who gave a helping hand.

Table of Contents
1.0 Introduction ....................................................................................................................................1 2.0 Factors affecting property finance in Colombo city.......................................................................2 The location of the proposed development ..................................................................................2 Interest Rates ................................................................................................................................2 Competition of industry ...............................................................................................................2 Economic Growth / Real income. ................................................................................................3 Consumer confidence ...................................................................................................................3 Availability of Mortgage Finance ................................................................................................3 Unemployment .............................................................................................................................3 Stock Market ................................................................................................................................3 Confidence of the investor ...........................................................................................................3 Legal restrictions, government regulations ..................................................................................4 Source of finance ..........................................................................................................................4 Equity ...........................................................................................................................................4 3.0 Developer Budget ...........................................................................................................................5 3.1What is a Developers Budget .....................................................................................................5 3.2 Example for a Developer Budget ...............................................................................................5 3.3 Factors to Consider when Preparing a Developer Budget .........................................................8 Acquisition Costs .........................................................................................................................8 Construction Costs .......................................................................................................................8 Professional Services....................................................................................................................8 Holding Costs ...............................................................................................................................9 4.0 Conclusion ....................................................................................................................................10 5.0 Reference ......................................................................................................................................11

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1.0 Introduction
The financing of property investments is very similar to the financing of any business venture there is a basic choice initially between equity (risk capital) and debt. Property investment takes many forms, revenues ranging from the traditional, direct ownership and trading of tenanted land and buildings, to contemporary capital markets where property are traded as securities or indeed derivatives. Greater flexibility and availability of indirect property investment products, plus improved performance benchmarking data means that property has attracted growing interest as an investment asset class. This also means that the property investment market is becoming much more complex and international in nature, as conventional property risks can be managed or mitigated more effectively over long distances. The wheels of the property market are oiled by the availability of finance from banks and other providers. Appropriate gearing allows property investors and developers access to larger opportunities and thus the chance to leverage higher returns. Finance and funding underlies much of the activity which goes on in the property market with deals ranging from relatively simple commoditized products such as residential mortgages to highly complex structured deals which may involve several tiers of finance from a variety of sources. Some financing is becoming increasingly aggressive underlining the requirement for sound knowledge and skills in this area Property development finance can be available for property developers, private builders or self made projects. There are specialized lenders, financial institutions and banks that provide such finance and are known for their speed, flexibility and reliability. Property development finance is required for commercial development, residential development, and property trading, planning gain finance and investment portfolios. This report consists of factors affecting the property development finance in the Colombo city as well as this report includes the definition of developers budget and how to develop a developers budget in the construction industry in order to be successful in the competitive property market.

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2.0 Factors affecting property finance in Colombo city

Property investors examining Colombo to have the most appropriate investment path to suit their own specific criteria for profit. The opportunities available to international investors are very broad but many opportunities are so specific and restrictive that an investor considering Sri Lanka should do so carefully. Caution should be applied to the selection of an investment type based upon initial and on-going costs, the realistic length of time until profitability and an individuals attitude to risk. Other than the above mentioned factors there are number of factors which are directly affecting to the property finance in Colombo city which are considered in this report

The location of the proposed development The location of a proposed development may play a significant part in securing property development finance. Priority should be given to Access, including proximity to interstate highways .Because the Colombo city is one of the main financial and economic center, location is very much appropriate to the property development and finance. Interest Rates The increase in interest rates has undoubtedly had an effect at the lower end of the market, particularly for first time purchasers and to some extent second purchasers but seems not to be affecting the middle and top end of the market, where the additional interest charges tend not to be material in relation to the levels of borrowing. People on fixed rate mortgages will be insulated from fluctuating rates for 2-10 years. Therefore changes in interest rates can have a time lag of up to 18months before their full effect is noted on demand for housing. It is also important to consider real interest rates (interest rates-inflation). Competition of industry Favorable conditions for property development will boost property finance sector in any country. A study of the competition of a industry will motivate a developer to invest. Having a competition proves that there is a excellent customer attraction.

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Economic Growth / Real income. Rising incomes enable people to spend more on property finance. Traditionally, rising incomes enable house prices to rise. If the economy goes into a recession and unemployment rises, the demand for property finance would fall significantly.

Consumer confidence During times of high consumer confidence, people are more willing to take out risky mortgages to be able to buy a house In the early 00s, people were optimistic about the property market and so took out mortgages with a higher debt to income ratio. Availability of Mortgage Finance With deregulation of the banking sector increased competition has seen a rise in the number of mortgage products. Products such as interest only, self certification mortgages and mortgages up to 6 times income have enabled people to get more mortgages, thereby increasing demand for housing. However, during the credit crunch of 2008, the number of mortgage products on offer fell due to a shortage of finance in the money markets. Unemployment Low unemployment is often associated with rising property development in the Colombo

Stock Market One of the other factors which may be affecting the market is the recent uncertainty in the Stock Market. Wide swings in the Stock Market tend to produce uncertainty in the property market and this can affect overall confidence in the market. Over the longer period however, a fall in the Stock Market is likely to increase the demand for property although this tends to be amongst professional investors in the buy to let market. Confidence of the investor The biggest single factor in the market still tends to be the confidence of the purchaser and this is best reflected in whether people buy before they sell. There are however increasing numbers of fixed prices appearing and if this continues it may be a reflection of sellers experiencing difficulty in at least selling at the prices which they seek.
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Legal restrictions, government regulations When the Government increases its property development projects there would be a crunch in the amount of finance available that could be dispersed to the private sector for example by means of Central Bank of Sri Lanka (CBSL) loans.

Source of finance Source of finance is a considerable point and it can be either short term or long term depending on the property that is going to be invested. So he has to consider the interest rate that is going to be paid for the debt finance

Equity Raising Equity can be a complex matter with many portions coming from various sources all on different terms. Our role is to obtain equity from institutional and private markets and bring each slice together to make a project viable.

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3.0 Developer Budget

3.1What is a Developers Budget
When a property is in the process of being built, a budget is prepared by the developer and approved by the initial board of directors for the newly formed association. This budget covers all of the components that the association will be responsible for (i.e., operating and reserve expenses). The initial board normally does not change this budget as this is the one that should be used as the property is built out. The intent of a developer's budget is to ensure that the association is adequately funded when the developer leaves. Once the property is built out and the association is transitioned from declarant to homeowner control, the board may consider other budget preparation methods when performing this yearly task. It is absolutely vital to make sure the amount you buy your property for makes it a sound investment before you commit yourself; rather than buying something that happens to be un modernised and then discovering that the cost of the development and the purchase price actually adds up to more than you can sell it for.

3.2 Example for a Developer Budget in Colombo city

DEVELOPER BUDGET EXAMPLE: REAL ESTATE PROJECT

PROJECT: NUMBER OF UNITS: TOTAL COST PER UNIT

Sample Project 23 123,000 % TOTAL

ACQUISITION Build Acquisiton Land Acquisition SITE IMPROVEMENTS Demolition On-Site Imp. 0 325,000 0.00% 11.49% 0 350,000 0.00% 12.37%

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Off-Site Imp. CONSTRUCTION Rehabilitation New Construction Contingency Tap & Impact Fees Permits Furnishings Other PROFESSIONAL FEES Survey Architect & Engineer Real Estate Attorney Consultant Tax Opinion Developer Fee Market Study Environmental Cost Certification Other CONSTRUCTION FINANCE Constr. Loan Interest Constr. Loan Fee Constr. Origination Appraisal Title and Recording Other PERMANENT FINANCE Perm. Loan Fee Perm. Origination Title and Recording Other

0.00%

0 1,275,000 250,000 0 0 0 0

0.00% 45.07% 8.84% 0.00% 0.00% 0.00% 0.00%

0 135,000 0 0 5,000 260,000 0 2,500 0 0

0.00% 4.77% 0.00% 0.00% 0.18% 9.19% 0.00% 0.09% 0.00% 0.00%

70,000 29,000 0 5,000 0 0

2.47% 1.03% 0.00% 0.18% 0.00% 0.00%

12,000

0.42% 0.00% 0.00% 0.00%

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SOFT COSTS Marketing Expense Organizational Exp. Constr. Insurance Property Taxes Syndication Expense Rentup Expense Relocation Other RESERVES Rentup Reserve Operating Reserve Other 0 75,000 0 0.00% 2.65% 0.00% 15,500 20,000 0 0 0 0 0 0 0.55% 0.71% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

DEVELOPMENT COST

2,829,000

100.00%

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3.3 Factors to Consider when Preparing a Developer Budget

Acquisition Costs Land or property acquisition costs normally match the price paid to acquire the property. If the land or building(s) were acquired sometime ago, an estimate of current value will be necessary for the project. Construction Costs "Unusual" improvements are costs which would not normally be incurred to prepare a site for construction or to put it in usable condition after construction. These costs include such things as demolition of existing buildings, removal of large amounts of earth to an off-site location or moving earth from off-site for fill or grading, off-site utility or road extensions, or other unusually large or exceptional costs. Even though the actual work may be done by a sub-contractor. Accordingly, these costs should be based on a contractor' s estimate. The best way to estimate construction costs is to obtain a preliminary projection from a contractor. An alternative is to have your architect estimate the costs based on comparable projects. In some cases an architect or contractor may only wish to estimate the costs of material and labor. Professional Services Architectural fees should be based on an estimate from the architect. These fees may be based on a percentage of the construction contract, a fee per dwelling unit, a flat fee for services or some other basis. There is commonly one fee for design and another for inspection services. The cost of a property survey, soil borings and mechanical and structural engineering tasks and other architects consultants may be included under architectural fees because these costs are related to the design of the site plan and buildings, and are often sub-contracted by the architect on behalf of the sponsor. Be sure to ask what is covered in the estimate and, later, in the actual contract for services. The costs of engaging a developer or project manager can be significant, but the benefit of experience and assistance can save time and costly mistakes.

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Holding Costs The period of time between the beginning of construction and the date when the project is fully occupied is called the holding period. Since any expenses the project incurs during this time are the responsibility of the developer/sponsor, it is important that you estimate them accurately.

Contingency fund amount

A property developer normally looks for property that needs to be refurbished, renovated or developed and then sold on. He may also build new properties from scratch. As a property developer you are only interested in the profit that is left after you sell the property. A simple way which is used by many developers to tell if there is enough profit in it for them is to calculate all your costs including your contingency fund. When you are calculating a budget for your property development, you need to put a contingency aside and that contingency should be at least ten or fifteen percent. There will be things that come along that you just haven't accounted for and things always cost a bit more than you originally think, so at least ten percent would be a decent contingency during property development.

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4.0 Conclusion
National and international property businesses are growing in developing cities including Colombo at the expense of a deteriorating living environment, higher congestions, land prices and property rents etc. hence managerial financial legal and political setups in cities are strong enough to face the challenges of sustainable urban development in prevailing rapid globalization process has become a common problem for cities at present. The majority of property developments are undertaken using funding from an external, third-party source, where the financier provides the difference between the developers available equity or cash equivalent, and the total cost of the project including all associated expenses over the development period until completion and the return of the initial loan (plus interest and associated costs). There are two forms of finance that are required for property development: short-term finance to pay for the initial costs of production (i.e. purchase of land, construction costs, professional fees and promotion costs) and long-term finance to enable developers to repay their short-term borrowing/loan and either realize their profit via selling or retain the property as an investment. Either option depends on the developers motivation, their financial situation and the prevailing market conditions Property investment takes many forms, ranging from the traditional, direct owner ship and trading of tenanted land and buildings, to contemporary capital markets where property revenues are traded as securities or indeed derivatives. Greater flexibility and availability of indirect property attracted growing interest as an investment asset class. This also means that the property investment market is becoming much more complex and international in nature, as conventional property risks can be managed or mitigated more effectively over long distances. The wheels of the property market are oiled by the availability of finance from banks and other providers. Appropriate gearing allows property investors and developers access to larger opportunities and thus the chance to leverage higher returns. Finance and funding underlies much of the activity which goes on in the property market with deals ranging from relatively simple commoditized products such as residential mortgages to highly complex structured deals which may involve several tiers of finance from a variety of sources as well as the Developers budget can be identified as one of the key planning system when considering the property finance in any country.

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5.0 Reference

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