Entry of private equity funds and access to more innovative forms of debt has in turn created a need for more sophisticated assessment of risk and financial modeling.
Financial modeling of real estate projects is a relatively new subject in India. In understanding the imperative for research to develop better financial models, it is also important to understand the nature of financial modeling with respect to the real estate sector and why it is different from other sectors.
The real estate sector, unlike other commodities, depends upon the right valuation of the raw materials in order to ensure better valuation of the final product, where by land valuation would greatly influence the actual value of the final development. There are various nuances while valuing land as a commodity. Firstly, the value of land is highly dependent on its location and exact use prescription (zoning and conversion laws). Value of land could also increase manifold based on the FSI accorded, the total aggregate unit of land available, as well as the clarity of the land title. Hence valuing this basic commodity is an involved process and that would be impacted by the credible information available.
Availability of credible information would determine the risks associated with the project and the appropriate risk adjusted discount rate that could be applied to the project. A higher discount rate would imply more risk and lower valuation of the project. High risk would imply costly access to capital, making the project unaffordable for both investors and end-users.
The new wave of IPOs as a means to raise equity from public markets has opened doors for the larger development companies to fulfill their financing needs. However, raising public

issues comes at a huge cost and it may not be a viable option for smaller players who would benefit the industry by providing more affordable products. These players are more likely to profit from the growing base of private equity and mezzanine financing firms, who in turn require relevant and updated information for decision making. Unless the industry can access credible information, it would be difficult to develop deep public markets for debt, equity and other derivatives. Deep markets provide access to capital in turn making the cost of capital cheaper and less risky for investors. It also provides for a wider range of exit options for investors and developers, making way for a more flexible industry structure.
The data for financial modeling needs to be collated and converted to ‘usable information’. This requires access to pipeline data on ongoing and planned projects. Building databases such as the International Property Development (IPD) of UK would go a long way in developing a platform of information which could be used towards more accurate financing models for the industry. The information would help benchmark risk and estimate the probability of returns, stabilizing the sector.
Role of research institutions would include identifying the key data point and research areas and mentoring research to help substantiate the processes and the financing mechanisms available to the real estate sector in India. In taking this forward the industry / institutions would be fulfilling a crucial need to provide professionalism and standardization for the real estate sector.
Urvija Shukla is a student of the Class of 2007. She has worked as an Urban Planner and is interested in real Estate Consulting.