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PROPERTY FINANCEPROPERTY FINANCEPROPERTY FINANCEPROPERTY FINANCE
Annual Affordable Housing Update:Annual Affordable Housing Update:Opportunities in a Changing EconomyOpportunities in a Changing Economy
Annual Affordable Housing Update:Annual Affordable Housing Update:Opportunities in a Changing EconomyOpportunities in a Changing Economy
Presented By: Vincent Rague, Presented By: Vincent Rague, Chief Investment OfficerChief Investment Officer
International Finance Corporation, Washington, DCInternational Finance Corporation, Washington, DC
IPED CONFERENCE - CHICAGOIPED CONFERENCE - CHICAGO
JULY 10 - 11, 2008JULY 10 - 11, 2008
Presented By: Vincent Rague, Presented By: Vincent Rague, Chief Investment OfficerChief Investment Officer
International Finance Corporation, Washington, DCInternational Finance Corporation, Washington, DC
IPED CONFERENCE - CHICAGOIPED CONFERENCE - CHICAGO
JULY 10 - 11, 2008JULY 10 - 11, 2008
Page 2
SUMMARY
1. GLOBAL TRENDS
2. IMPACT of RE ON ECONOMY
3. CONSTRAINTS AND CHALLENGES
4. IFC ROLE
5. IFC PROJECT INVESTMENT CRITERIA
6. EXAMPLES OF DEALS
7. CONCLUSION
Page 3
Global Trends
Demographics:1. Rapid Global Population Growth, most of it in Emerging
Markets Africa’s Population: 669 million (2000); and Over 770m (2006) –
most under 30 years of age E.g. Turkey’s Population: 36 million (1970); and Over 70m (2005) –
most under 30 years of age
2. Rapid Urbanization - Rural Urban migration Africa’s Urban Population/Total Pop: Less that 20% (1970) vs. 41%
(2002) Turkey’s Urban Population/Total Pop: 29% (1970) vs 61% (2002)
Page 4
Global Trends (Cont)
Economics, Politics and PolicyCompelling GDP Growth Rates for Emerging Markets vs. OECD (% p.a.)
2002 2003 2004 2005 2006
Asia (ex-Japan 6.2 7.0 8.0 7.5 7.1
Emerging Europe 4.1 5.3 6.4 5.7 5.8
Latin America -0.2 2.1 5.8 4.3 4.4
USA 1.6 2.7 4.2 3.5 3.4
Europe 1.0 1.0 2.1 1.6 2.3
Japan -0.3 1.8 2.3 2.6 2.9
AFRICA(Source: IMF)
3.5 4.3 6.2 6.1 5.5
TURKEY 2.8(93-2002)
5.9 9.9 7.6 6.0
Page 5
Global Trends (cont)
Economics, Politics and Policy
S&P Credit Ratings
Sept 28, 2001 April 30, 2007 ∆ in Notches
China NR A Na
Indonesia B- BB ↑4
Korea A A+ ↑1
Malaysia A A+ ↑1
Mexico BBB+ A ↑2
Romania B+ BBB ↑5
Russia B A- ↑8
South Africa A- A+ ↑2
Turkey B- BB ↑4
Source: S&P, Sept 2001 & April 2007
Page 6
Rating of Select African Countries
Page 7
Global Trends (cont)
Economics, Politics and PolicyPolitical StabilityStructural Reforms of EconomyLiberalization – globalization econ integration
Increased Access to Mortgage/Housing Finance
Economic Integration – Regional Blocs, NEPAD, etc.
Page 8
Global Trends (Cont)
Impact on Real Estate SectorGrowing pent-up demand for urban infrastructure
roads, water, electricity, sewage, etc.
Growing Incomes and Growing Middle Class
Increased demand for quality accommodation• housing, commercial, industrial, hospitality and social space
Growing aspirationsAdoption of Global Norms and StandardsProliferation of Unplanned Settlements
Page 9
Role of Real Estate, Housing in Economy
Huge Economic Impact – Employment, Commerce and Industry
– In the US
» Housing Accounts for approx 8% of GNP
» Housing and Housing Services Account for approx. 18% of GNP
Page 10
Attractive YieldsYields in Select Countries
Botswana Egypt Kenya Nigeria South
Africa
Zambia
Office 12% 11% 12% 9% 8% 12%
Retail 11.5% 9% 14% 8% 8% 11%
Industrial 14% 12% 15% 14% 9% 15%
Residential 15% 8% 9% 6% 5% 14%
Page 11
CONSTRAINTS TO REAL ESTATE SUPPLY
Huge Pent-Up Demand for Housing and Real Estate IN EMERGING MARKETS High Transaction Costs (Stamp Duty/Transfer
Taxes) Lack of Transparency & Reputation Issues Highly Fragmentated Limited Access to Large Pools of Risk Capital Limited Capacity by Municipalities and
Governments to deliver Bulk Infrastructure• Roads, Sewage, Water, Electricity, etc.
Page 12
Lack of Housing Inventory
(supply/demand imbalance)
Why IFC & Property Finance
Many emerging markets, there is a logjam of development in Mortgage/housing finance…..
Developers not producing
sufficient inventory - lack of risk
capital & mortgage takeout
Mortgage markets are under-
developed due to scarcity of housing
stock
Page 13
IFC Role and Additionality
IFC’s Goal is to help create viable communities By Supporting:
• Development of Local Property Markets• Increased Access to Risk Capital for Property Finance• Catalyst To Attract Foreign Investment• Deepening of Local Capital Markets • Supporting Public Private Partnership Initiatives – to
Deliver Sustainable Urban Infrastructure• Sustainability, environmental standards and best
practices
Page 14
Investment Vehicles: Investment Types & Options
Every market is unique.
Integrated Property Company that delivers all aspects of RE Value Chain
Real Estate Investment Trust
Real Estate Development Facility – on
a project-by-project basis Unbundled parts of R.E. Development – upfront soft costs and infrastructure
Investment solutions are typically Integrated - tailored based on Sponsors and investment/market opportunities.
Trusts – especially for Not-for-profit urban renewable and affordable housing
Page 15
Property Finance Value Chain
Detailed DesignInfrastructure
Devt Origination
Urban Planning & Permits
Land Acquisition
Mortgage Finance
Sales & Marketing
Construction Finance
Transfer & Titling
Construction
Unique Solution Driven Service Offering…
Feasibility Study
Page 16
IFC Investment Products
CAPITAL MARKETS
MORTGAGE FINANCE
CONSTRUCTION FINANCE
Senior Debt – S-TPCG
REIT Corp Bond; ABS
etc.
Equity
Mez Debt
PCG
Senior Debt
Development Stage Finance
Construction Finance
Mortgage Finance
Capital Markets
In.
Ris
ks
… investments at different levels in the value chain given the risks
Page 17
A Typical Deal: Prerequisites
Requirements of the Deal:
Transparency at all operational levels
On-site full time and professional Project Management
Clear Land and Property Titling Regime
Strong Reputable Sponsors
Adoption of Global Norms and Standards in corporate governance, financial reporting and accounting
Adoption of Sustainable Environmental and Social Standards
Page 18
Typical Deal Structure of a Large-Scale Housing Production Project
Equity Partners:• Core Sponsor• Others to be decided (could inc.
IFC)
Upfront Costs:• Land • Soft costs • Portion of infrastructure works• Government permits • Initial construction phase
10 % to 50 % of total funding needs 50% to 70% of total funding needs
Banks: Major and mid-size banks to share risk and gain experience in Construction Finance
Capital Markets: SPV issues MTN w/tranches and rollover provisions, in local currency, variable rate, IFC partial guarantee
Equity Side Debt Side
Page 19
Case Study 1 – ARECO - South Africa
Sponsor
IFC
Other Investors
DEVCO
PROPCO
• Propco is a portfolo company of Sponsor, plus other potential investors
• It holds for long-term investment a portfolio of developed properties, many developed by Devco, some developed by other developers.
• Devco originated properties are sold to Propco on an arm’s length, full valuation basis
• IFC will not be a shareholder in Propco
• Devco is a pure property development company, likely set up as a JV between Sponsors other developer(s).
• IFC may take a stake in Devco• It acts as developer of both commercial and
residential properties• Execution of development only, obtaining fees
for development services rendered• Property management fees are earned for
management of completed properties, whether sold or held.
• Portfolio of residential and commercial properties
• Developed by Devco• Some properties sold off to Propco (example:
SPV4), or to other investment vehicles• Other Properties retained because they are
judged to not yet have matured or attained maximum valuation
SPV1
SPV2
SPV3
SPV4
SPV5OTHER INVESTORS
Prop
Co
InvestmentCommittee
Equity Investment
Page 20
Case Study – GRDC, Georgia
Project Description
• Local sponsors –• International sponsors – individuals and institutional• Strong management team – Solid execution capacity and
local market experience
IFC Investment
Sponsor & Management
Risks & Issues
• Valuation• Investing in a land bank• Constructions Loans, a new area for IFC?• Implementation risk
• Capitalization of vertically-integrated real estate company in Georgia to finance the development of its portfolio of 18 properties
• IFC invited to join Round # 3 of equity financing and provide debt facility on a project basis.
• Equity Investment: up to 20%• Debt Investment: Total equity and Debt of Up to 35% of Project cost
Page 21
Case Study – GRDC, Georgia
Equity Investment at Holding Level
Debt Investment at Project/SPV Level
Valuation- Methodology- Negotiation
Exit- Sunset/Liquidation-IPO or Sale
FinancialReturn
Cash FlowAnalysis
Security &Covenants (incl.
DSCR, DSRA, etc.)
Monitoring and Supervision
Page 22
Property/Construction Finance: TUHF Multi-Family
International Finance Market
IFC
TUHF
Owners
Credit Line
Mortgages
RentersRent Contracts
Page 23
Before and After TUHF Financing
Page 24
CONCLUDING REMARKS
Attractive Investment Opportunity – for both local and foreign investors
Opportunity Requires Institutional Approach – to attract capital and large scale projects
RE Has Huge Development Impact Helps Develop Local Capital Markets Creates Sustainable Urban Environments Challenge Remains to Find Solutions to Address
Affordable and Social Housing Needs
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