Upload
vikram-jethwani
View
1.159
Download
1
Tags:
Embed Size (px)
DESCRIPTION
This publication provides insights on the commercial real estate market, which is bearing the brunt of subdued economic activity, high cost of finance and falling rental incomes.www.wcgt.in/publications
Citation preview
RealtyReality Insights for Real Estate and Infrastructure industry leaders
A newsletter under Grant Thornton Insights series | Issue 5
Grant Thornton
INSIGHTSSeries
About Grant Thornton Insights Series
Grant Thornton Insights Series brings to you a set of
tri-annual thought-leadership newsletters such as:
• Aspire: Insights for dynamic business owners
• India Ahead: A snapshot of emerging economic and
business environment in India
• HealthScope: Insights for Healthcare and Life Sciences
Industry leaders
• RealtyReality: Insights for Real Estate and Infrastructure
Industry leaders
• TechEdge: Insights for Information and Communication
Technology Industry leaders
This series of publications draws on our industry expertise,
clients‟ experiences and our commercial know-how. It
discusses the underlying issues, challenges, and industry and
market dynamics that impact Indian businesses over medium
to long term.
More about RealtyReality
Published tri-annually by Grant Thornton India, RealtyReality
is a thought-leadership newsletter focused on providing
leading-edge insights on the Real Estate and Infrastructure
industry of India.
Acknowledgement: Neeraj Sharma & Misbah Hussain
Editor: Vikram Jethwani
www.wcgt.in/publications
Preface | Pg 4
Strategic framework for CRE
companies| Pg 14
Preface
The weakness in global economy has created
considerable levels of distressed real estate in a
number of markets around the world. In all but a few
locations, reduced economic activity and growth
prospects have led to falling rental incomes, collapsing
property values and construction projects being put
on hold.
This in turn has turned many previously „performing‟
commercial real estate loans and investments into
„underperforming‟ or „non-performing‟ assets. Banks
and other lenders are increasingly being exposed to
these assets.
This situation is further complicated by the reality that
many lenders are themselves in varying states of
"distress", and are trying to resolve their portfolios of
distressed loans. Faced with significant regulatory
pressure, banks are tightening lending criteria,
reassessing loan to value ratios, and trying to shore up
their RE&C loan portfolios in order to preserve their
own financial independence.
Some banks have become less willing (and possibly
unable) to negotiate better terms from the perspective
of the distressed asset holder.
RealtyReality | 4
In other cases, however, lenders are selectively
ignoring the issue in order to avoid writing down loan
values, which would potentially compromise their
own balance sheets and capital adequacy
requirements. In effect, these institutions are
essentially hoping that the economy will right itself
and their loan portfolios will recover without the need
of significant additional capital injections into the
bank.
"Though many observers believe that the recession officially ended
in the summer of 2009, most industries, including commercial real
estate, continue to feel its effects. CRE industry fundamentals
remain subdued and according to industry estimates, no meaningful
recovery in the West, can be expected soon. This is not surprising
given that the CRE industry usually lags behind the general
economy by 12 to 18 months. The extent and timing of upswing in
CRE will largely depend upon geographic market and asset class."
RealtyReality | 5
Vishesh Chandiok
National Managing Partner
Grant Thornton India
Global landscape
RealtyReality | 6
The US:
• As per industry estimates, over US$1.4 trillion of debt in real estate assets will
become mature by 2014, creating immense pressure on banks for coming up
with solutions to resolve troubled loan issues.
• This scenario can have a delimiting effect on the recovery of the US economy,
owing to the pressure on banks to sell loans at a price lower than their face
value, in order to prevent losses.
• Driven by the assumption that valuations will increase in 2011, Real Estate
Investment Trusts (REITs) will begin to look out for opportunities to acquire
properties, including the distressed properties, at reduced prices.
Brazil and Mexico
attracts most of the FDI
in Latin America's
CRE market
The UK:
• UK's CRE market continues to show signs of weakness with occupier
demand falling in negative territory.
• Lenders will be under pressure to find ways to resolve their troubled loan
portfolios due to the wave of debt maturities.
• Property prices in the country will become stable, owing to the
normalisation of the supply and demand balance.
Global landscape
RealtyReality | 7
Russia:
• It is expected that demand in the commercial real estate sector
will increase marginally, owing to the reduction in vacancy
rates.
• In the overall realty sector, warehouse and retail are expected
to clock the fastest growth.
• The sector is likely to attract sizeable investment; especially in
the the high-quality small to medium size property segment.
Brazil:
• For the next two years, Brazil, being the host of the 2014 FIFA World
Cup and 2016 Olympics, will continue to attract huge investments in
the hospitality sector.
• An export-led boom along with surge in household incomes, entry of
new conglomerates and the increasing trend of opting for better-
placed or more attractive office spaces are the reasons that will drive
the demand for commercial property in the near future.
• Demand for real estate will also be impacted by the recent legislation
reform establishing increased lines of credit to the local mortgage
market as well as consumer finance.
Global landscape
RealtyReality | 8
China:
• Though China, like all other BRIC economies, show resilience, its real
estate market is not completely insulated from the global pressure.
• As the opportunities for investing the bulk of domestic savings remain
bleak in the country, real estate will continue to remain an attractive
avenue for investment.
• Affordability has decreased marginally due to the bleak financial
situation of the local government, which is widely in debt after being
handed billions of Yuan in bank loans.
India:
• Banks have reportedly increased risk weightage on CRE financing. Real
estate companies may face cash flow pressure, while they replace low-cost
debt by high-cost finance.
• Developers would be more receptive to new and more collaborative lease
models, in acknowledgement of tenants' concerns.
• Metropolitans may not witness growth in rentals, however, properties that
enjoy strategic locations in Tier 2 and Tier 3 cities are expected to register a
relatively higher rate of growth in rentals and capital values, in the next 2-3
quarters.
However, the industry is about to face a post-recession
paradigm, which it has never seen before. The recovery
following the 2001 recession is not a good benchmark because
access to capital may be much more severely constrained. The
lending market will probably be flooded with demand, while
higher loan-to-value ratios, tighter credit standards and an
uncertain securitisation market may limit refinancing
opportunities.
Interest rates are currently at historic highs, and any
further increase in these rates will not only impact the
profitability but also the viability of many CRE projects now
teetering on the brink. Those who are unprepared for the shift
in the industry may find themselves battling for scarce capital
— even as they struggle against competitors that took
advantage of the downturn to prepare for the recovery.
Therefore, time is of the essence. CRE companies have a
limited window of opportunity during this industry downturn
to make important changes that will affect their future
performance and viability. All new initiatives should be
evaluated based on their cost versus long-term value
contribution. The urgent need today is to take forward-
thinking actions that will drive future growth.
Commercial real estate: headwinds in India
The various players in the CRE industry are in a stalemate of
sorts. Not enough buyers for CRE assets currently exist,
especially if one excludes the so called vulture investors. The
lending community is delaying foreclosure procedures and sale
of real estate-owned properties because of depressed values.
These factors foster an environment of stagnation in the
global CRE industry, due to which companies may be tempted
to limp along and simply survive.
As per media reports, the Reserve Bank of India has
expressed concerns on escalating real estate prices and
advised banks to keep a stringent check on loans to
CRE companies of late. In order to regulate risks and
make loans expensive, banks have reportedly increased
risk weightage on loans to developers.
Amidst this scenario, developers who have already
initiated their projects now have no choice but to
borrow from non banking finance companies at interest
rates ranging from 16-20%, private lenders at 20-35%,
and private equity firms at 25-35%. This is turn has
started putting pressure on developers and the entire
market at large.
Commercial real estate: headwinds in India Top 5 challenges for CRE companies in 2012
RealtyReality | 10
Interest rate hikes
Inflationary pressure
Cost of construction
FDI & FII inflows
Skilled manpower
43%
23%
22%
7%
5% With a view to figure out the top-5 challenges for CRE companies in
2012, Grant Thornton India conducted a survey covering more than
100 CRE developers and dealers in the National Capital Region
(NCR), Mumbai and Bengaluru. The response from the participants
has been collated as above.
“In tandem with the global economic environment, the commercial real
estate sector is in a phase of consolidation. Both real estate developers
and investors are evaluating their current strategies and future
expectations.
Nevertheless, challenges and opportunities are going hand-in-hand:
coping with interest rate hikes and inflation; protecting profits while
continuing to invest; leveraging vibrant domestic economy; seizing
international opportunities; differentiating products and services; retaining
and attracting talent; and cultivating stronger relationships with lenders
and fund managers.
Success in real estate business largely hinges on how you navigate these
complexities, while retaining investor and buyer confidence, and
maximising stakeholder returns.”
11
David Jones
Partner and Practice Leader – Real Estate
Walker, Chandiok & Co.
Strong financial analysis
Developing a financial forecast of continuing and future rental
revenues, complete with cost analysis and identification of
opportunities to reduce costs could help formulate
strategies to control pressure.
Tenants are typically required only to disclose a minimal
financial picture, and property owners are faced with a lack of
visibility into current and future rent/revenue streams. Some
RE&C owners display poor record keeping with respect to
loan covenants and hence, risk that they are, or will be, in
breach.
Negotiate terms, consider re-financing
Developers shall consider assessing their lender‟s ability to
negotiate terms and, if appropriate, consider proactively
negotiating with the lender, prior to breaching loan covenants.
Considering options for refinancing also helps in avoiding
the risk of foreclosure. Some of the options to be considered
include extending the term of the loan, restructuring their
credit, or improving management of the property to
accommodate the needs of tenants who are also facing
financial difficulties.
Making ways through panic stations
RealtyReality | 12
Amidst the situation of uncertainty in the global economy and
weak cues in the domestic market, Indian real estate
developers need to evaluate their options for renegotiating
loans. To do so effectively, they need to have a thorough
understanding of their own financial position as well as
that of their lenders.
In order to face multi-pronged pressure from the market,
developers shall consider the following:
Portfolio stress-test
For Indian real estate developers, it is the need of the hour to
assess the severity of financial condition, on the spectrum
ranging from potential risks to major problems, both current
and future.
In particular, these tests should look at risks of major
tenants leaving or going bankrupt, any co-tenancy
agreements and exposures, and the industry outlook for the
various types of tenants currently occupying the properties.
Making ways through panic stations
RealtyReality | 13
In-depth
financial
analysis
Re-negotiate
terms
Stress-test
portfolio
Mu
lti-
pro
ng
ed
ma
rke
t p
res
su
res
examine exposure to risks
forecast realistically
re-visit loan covenants
re-negotiate with lenders
consider re-structuring
improve management, prevent leakages
Strategic framework for Indian CRE companies
In the current market scenario, it is advisable that CRE
companies map the universe of available actions on a
cost-value matrix that has two dimensions: the long-
term value added and the short-term costs incurred.
Actions taken by the company will fall into one of the
four quadrants:
Myopic (low value, low costs)
Actions in the lower left quadrant are not costly to
implement, but they have low (and in extreme cases,
negative) long-term impact. One example of this kind of
activity is leasing to risky tenants in order to boost short-
term occupancy. Similarly, companies often slash capital
spending and selling, as well as general and
administrative costs, without analysing the long-term
impact of their actions.
A company should avoid taking actions that decrease
long-term value and should minimise low-impact
actions that may distract management from pursuing
strategic initiatives.
Conformer (low value, high costs)
Actions in the upper left quadrant are costly to
implement and have minimal long-term impact. These
actions often relate to problems, which should have been
addressed previously, such as weak or dysfunctional
information and control systems, a lack of discipline
in executing agreed upon plans, and inconsistency
of the cash management system with the stakeholder
requirements.
RealtyReality | 14
Conformer Forward
thinker
Myopic Cherry
picker
High
Low
Low High
Long-term value
Sh
ort
-term
co
sts
The four quadrants of action for CRE companies
Strategic framework for Indian CRE companies
Correcting these problems in a shortened time period
can be costly in terms of both time and dollars.
Companies carrying out actions that fall in this quadrant
should attempt to move towards more meaningful,
higher-value initiatives that yield more results at the same
cost.
Cherry picker (high value, low costs)
Actions in the lower right quadrant are not costly to
implement, yet they have high long-term benefit.
Examples include a review of portfolio performance,
disposition of noncore assets, cash generation
measures, and a reduction in overhead and
discretionary capital expenditures.
Because these actions are the corporate equivalent of
low-hanging fruit, a company must assume that its
competitors are drawing advantage from its actions. Any
company that strives to be more competitive must
consider investing additional resources in initiatives,
having the potential to transform it into a market
leader.
Forward thinker (high value, high costs)
Actions in the upper right quadrant are costly to
implement but have high impact. Most of these actions
demand the use of resources — capital, time, labour —
without offering short-term returns. Examples include
strategic capital investments such as the
reconfiguration of leased space, new or redesigned
marketing programs, and strategic acquisitions and
divestitures.
Unsurprisingly, not all companies are willing — or even
able — to make large investments, particularly during a
period when global signs are weak. But it‟s important to
remember that even though these actions do not yield
immediate results, they do have the potential to set the
business apart from its competitors.
RealtyReality | 15
Grant Thornton International
Grant Thornton International is one of the world‟s leading organisations of independently owned and managed accounting and consulting
firms. These firms provide assurance, tax and advisory services to privately held businesses and public interest entities.
Clients of member and correspondent firms can access the knowledge and experience of more than 2,500 partners in over 100 countries and
consistently receive a distinctive, high quality and personalised service wherever they choose to do business.
Grant Thornton India
Grant Thornton India is a member firm within Grant Thornton International Ltd. The firm is one of the oldest and most prestigious
accountancy firms in the country.
Today, it has grown to be one of the largest accountancy and advisory firms in India with nearly 1,100 professional staff in New Delhi,
Bengaluru, Chandigarh, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai and Pune, and affiliate arrangements in most of the major towns
and cities across the country.
The firm‟s mission is to be the advisers of choice to dynamic Indian businesses with global ambitions- raise global capital, expand into global
markets, adopt global standards or acquire global businesses. The firm specialises in providing compliance and advisory services to growth
oriented, entrepreneurial companies, and adopts best-in-class international tools, methodologies and independence/ risk management
standards for all its services.
About Grant Thornton
© Grant Thornton India. All rights reserved. 17
Our real estate practice
Real estate is a complex business. Owing to its capital intensive nature,
any turbulence in the economic and business environment can affect a
real estate business in a number of ways. With its depth of knowledge
and global experience, Grant Thornton India can assist you in mitigating
these inherent risks. At the same time, we can help you identify and
leverage potential opportunities as well. Assurance, tax and advisory
services are just the beginning of our suite of services.
Please contact Nidhi Maheshwari at [email protected]
or +91 77380 57904 to know more about our solutions for real estate
companies.
Financing your business
• analysing funding requirements
• preparing submissions to financiers
• benchmarking terms and pricing
• considering alternative sources
Working capital management
• managing your cash
• forecasting and re-forecasting
• optimising tax cash flow savings
• improving management information
Protecting profits
• product portfolio analysis
• optimising pricing strategy
• enhancing terms of trade
• identifying overhead savings
Operations and cost reduction
• establishing cost reduction
programmes
• improving supply chain
• enhancing operational efficiency
• outsourcing back office functions
Communication and compliance
• advising on financial reporting requirements
• clarifying directors‟ responsibilities
• mitigating fraud risk
• evaluating and designing controls
Human capital management
• optimising pension and benefit schemes
• retaining the right staff
• devising tax efficient packages
• enhancing reward packages
Strategic direction
• benchmarking against competitors
• entering new markets
• identifying acquisition opportunities
• reviewing business plans
Solutions for real estate companies
NEW DELHI National Office Outer Circle L 41 Connaught Circus New Delhi 110 001
CHANDIGARH SCO 17 2nd Floor Sector 17 E Chandigarh 160 017
GURGAON 21st Floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon 122 002
HYDERABAD 7th Floor, Block III White House Kundan Bagh, Begumpet Hyderabad 500 016
MUMBAI Engineering Centre 6th Floor, 9 Matthew Road Opera House Mumbai 400 004
PUNE 401 Century Arcade Narangi Baug Road Off Boat Club Road Pune 411 001
CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai 600 004
BENGALURU “Wings”, First Floor 16/1 Cambridge Road Ulsoor Bengaluru 560 008
KOLKATA MBC 6th floor Block A 22 Camac Street Kolkata 700 016
© Grant Thornton India. All rights reserved.
www.wcgt.in
Disclaimer
The information contained in this document has been compiled or arrived at from various surveys and other sources believed to be reliable, but no representation or warranty is made
to its accuracy, completeness or correctness. The document is published for the knowledge of the recipient but is not to be relied upon as authoritative or taken in substitution for the
exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice or opinion and the contents in this document are
subject to change without notice.
Whilst due care has been taken in the preparation of this report and information contained herein, Grant Thornton does not take ownership of or endorse any findings or personal views
expressed herein or accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this report or its contents or otherwise arising in connection
herewith.
Our offices in India