Real estate trade finance refers to a form of financing that supports real estate traders in temporarily financing the purchase, renovation and/or sale of real estate. It is aimed at real estate projects with a short lead time, where the aim is to generate a quick profit by purchasing properties, renovating them (if necessary), and selling them again or refinancing them.
Characteristics of real estate trade finance:
- Short term: Usually ranging from a few months to a maximum of two years.
- Flexibility: Focused on fast financing, often within a few weeks, so that the real estate trader can quickly respond to market opportunities.
- Focus on value growth: The financing usually covers part of the purchase price, renovation costs, or both. The premise is that the real estate trader adds value through strategic renovations or better positioning of the property.
- High return, higher risk: Because the financing period is short and the transactions are dependent on market conditions, the risks can be high. Financiers therefore often impose strict conditions on the coverage ratios, such as LTV, LTC or LTGDV.
- Security: Usually a right of first mortgage is established on the financed real estate as security for the financier.
When is trade financing used?
- Fix & flip projects: Real estate traders buy an outdated property, renovate it, and sell it at a profit.
- Strategic purchases: A property is purchased below market value, for example through a foreclosure auction, with a view to quick resale.
- Transformation projects: Real estate is converted, for example from office space to homes.
Difference with regular real estate financing:
Trade financing focuses on fast, short-term transactions, while regular real estate financing often has longer terms and is intended for investments with stable rental income.
Example:
A real estate trader buys a vacant office building for €500,000 with trade financing. He spends €200,000 on renovations to convert the property into apartments and sells it within 12 months for €900,000. The financing is repaid with the proceeds, and the profit is realised after deduction of costs.
Trade finance provides real estate traders with the liquidity they need to actively trade in real estate and respond flexibly to market opportunities.