Last November 15 and 16, APREA conducted a seminar entitled “Real Estate Investment Analysis.” True to its title, the seminar did not really impose any conclusions about the current state of the real estate market but, rather, focused on the transmission of global best practices with respect to approaching real estate investment decisions, research, financial analyses and presentation of conclusions and recommendations.
Real Estate Investment Framework
While the typical real estate broker tends to focus on market news, marketing and sales; and while real estate appraisers focus on market conditions as of a fixed date; a real estate analyst needs to have a disciplined look at the market in terms of cycles (market cycles and asset cycles) with different stages and different layers of investment strategy, risk management strategy and capital market conditions. While this process is more labor and human capital intensive, the framework pays off later on as opportunities to profit can be had at all stages of the property cycle with proper analyses. A good real estate analyst can find opportunities in boom, bust and any period in between.
A RE analyst has different strengths and weaknesses represented by his RFP rating. This is how the analyst rates himself/herself in terms of research skills, financial modelling skills and presentation skills (see figure 1 above). Over the course of the seminar, it became painfully obvious that not all analysts will have the same strengths and weaknesses since not every analyst has the same aptitude nor the appetite for one skill compared to others. One analyst may have high I.Q., enjoy research and or financial modelling but can be outclassed by an extrovert with high E.Q. in presentation. Therefore it pays to have a balanced team when developing an investment proposal for a big transaction.
During the asset cycle itself, some skills are more employed compared to others (see figure 1). Sourcing (or finding an investment target for acquisition) will certainly require more research and presentation skills (for scouting and introductions). On the other hand, acquisition requires financial modelling to accurately measure the economic pros and cons of acquiring particular assets and their alternatives. Asset management stage may not require as much research and the selling or disposal/exit stage requires less presentation skills compared to other stages (“presentation skills” as used in the context of the seminar, involves effectively presenting to an investment board, project and financial summaries in the form of charts and figures to support a decision to green light or halt a project).
The RE analyst practices his/her analytic skills with due consideration to the investment strategy of a target audience, which may differ depending on the nature of their business.
REAL ESTATE QUADRANT
Using a real estate quadrant as a framework for understanding real estate investment decisions (see figure 2), it becomes obvious that there are different types of investors with different appetites for risks and payoffs and their preferences are determined by their specific business models. For example, an insurance company would prefer existing, income-generating properties such as a mall with high occupancy to a green field development such as a residential condominium project with a mostly unit sales business model.
Besides investment strategy, the risk tolerance of the target audience will also have to be considered. Some companies such as private equity firms or venture capitalists can tolerate high investment risk at the cost of temporary control while banks and government institutions will tend to be more circumspect, requiring higher standards in risk management and several layers of security such as collateral, corporate and personal guaranties.
All of these decisions take place under changing capital market conditions, which may make or break investments. Certain metrics like inflation and interest rates directly impact project viability while foreign exchange rates affect the investment decision of foreign players or projects with major foreign components.
The seminar included an exhaustive list of possibly all sources of public and private real estate data. It emphasized covering all potential future developments and how these would impact RE investment decisions. However, for purposes of the seminar, research was the least-discussed of the analytic skills. Instead, a case study was assigned, complete with what seemed to be HABU-compliant current market data, to be subjected to participants’ analyses.
This section of the seminar generated the most handsome returns for attendees. Participants were instructed on how to generate key cost and benefits metrics for a proposed project on a Microsoft Excel spread sheet using a best practices format, which proved at least ten times more productive compared to currently-used techniques in Philippine appraisal.
In brief, the attendants were taught how to generate a simple financial model simpler than what is used in most business valuation exercises. However, the innovation was in the compartmentalization of the spread sheets that enabled the use of sensitivity analysis matrix functions of excel, which promises to free up several hours’ worth of laborious excel/spread sheet work in favour of more productive analysis.
As the trainer said, the skills are best transmitted in practice, which was exactly how the attendees were trained and coached.
The last major section of the seminar involved the presentation of the case study to a panel consisting of senior industry experts proficient in law, finance and research. The class were divvied up into three groups, given case data and made to analyse and propose a real estate project to the board. Each group made a presentation based on their findings and made a recommendation. The investment board then made productive criticisms on each presentation based on their knowledge and experience.
It was amazing to see how productive a best practice system can be. It enabled a small group of strangers to work together and make a professional presentation to an actual investment board within the span of –literally-a few hours.
The lessons learned from such an experience cannot be overemphasized and best practice in real state analytical training is highly recommended to industry practitioners, especially when the ASEAN market integrates in 2015. However, one cannot enter the seminar with basic knowledge in real estate research, finance and presentation. It is highly recommended that those entering such training be competent in at least two facets of analytical skills. Those with a modicum of experience in financial modelling or analyses and those seeking real world experience in project-pitching skills will be thoroughly delighted.
Written by: Roque Sorioso
Some of the photos are copyright-protected property of Asia Pacific Real Estate Association (APREA)
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