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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

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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

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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)

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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

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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

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Rating of Select African Countries

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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.

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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

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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

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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%

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Property/Construction Finance: TUHF Multi-Family

International Finance Market

IFC

TUHF

Owners

Credit Line

Mortgages

RentersRent Contracts

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Before and After TUHF Financing

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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