Money, Money, Money… Where is the Money? (II)

by Alvaro HIDALGO

As a follow up to our entry in late January 2011 http://bit.ly/dHQTrc and as usual in a market downturn, the first thing to notice is that the IMF forecasts mentioned  then have -again- proven wrong.

From a global markets’ perspective, August is proving to be an awful month, most markets losing an average 10%, even more in the banking & finance sector. And under this doom & gloom few are ready to think about new operations or investments.

Again, it’s not that there are not funds available…it is the aversion to risk!

With regards of Real Estate and/or Residential & Tourism developments, most funders/ bankers/ investors have been fighting & suffering to reduce their exposure to real estate over the last two years. And those coming out of such ordeal, will now smile -or blatantly laugh- if you meet them and ask for funds for a new project.

So?

Probably the biggest change that happened in the last 8 months is that investors, once achieved the stabilization of their portfolio after 2 years of asset & debt consolidation, are now becoming aware that liquidity needs to be allocated. Indeed, Banks and professional investors see that operational margins have been healthy and –in many cases- sufficient to compensate for all the bad debt losses....up to now. But to continue obtaining those margins they need to invest & fund or finance new operations.

This need to allocate funds applies to individual investors too. In spite of the destruction of wealth that this market crash represents, there is liquidity desperately looking for alternative investments that minimize risk:

ICI estimates $40Bn withdrawn from funds in the last month

Stock markets are not even being considered, Funds & fund managers are not trusted (see chart) any kind of debt /sovereign debt is frowned upon, general commodities are on average suffering from the foreseen economic downturn, main currencies are becoming more volatile...… only the safe havens are sought after. Therefore Gold is skyrocketing and Swiss Franc is steadily gaining strength.

Moreover, individuals have even further concerns and start doubting Banks and Financial Institutions' solvency and wondering whether their deposits are safe.

Thus, under this market environment one should go back to basics: Fixed assets and Real Estate have traditionally been a safe haven to preserve wealth through uncertain economic times.

This may sound almost like a joke after all we have suffered, but we all know now that the 2007-2010 Real Estate crisis was generated by excess of liquidity and indiscriminate access to debt enhanced by mortgage loan packaging and its effects in housing prices. When the scheme ran out of fuel, the whole system collapsed.

Housing prices back to rational levels

In any case, all that is old stuff.

Nowadays, a severe correction (30% - 50%) in Real Estate prices has already been incorporated & absorbed by the market in most countries & regions.

Whether there is room for a further correction or not is arguable, but it is likely that  we are now close to the levels where housing prices should rationally be.

Therefore, it is now time for added value projects, clearly differentiating themselves by targeting specific market niches.

And to assure lenders & investors that sales and revenue will be there and they will get repaid, and simultaneously assure buyers that they will maintain value,
one must go –once more- back to basics and trust in three major truths:

•   Location, Location, Location
•   The power of the brand
•   Productivity and return

…which get us back to Branded Residences.

Indeed, they do attract customers with powerful brands and they run with operational agreements/ condo-hotels that provide a source of revenue. Additionally, the nature of the business requires them to be in the right location.

From a funder point of view, Branded Residences provide a higher level of liquidity (being secured by the brand and the market niche) when compared to standard assets. But, most importantly, they grant additional levels of security by (i) allowing pre-sales and (ii) bringing a built-in source of revenue….even if sales were sluggish in the initial stages, the operation will provide the revenue required to cover payment of at least the interests from day one.   Hence, for Buyers and Investors, the Branded Residences concept provides overall solidity to the project. And, in the same way that the brand serves the final client and the operator, it does also attract the banker/funder as it buffers many of the risk factors.

Does this mean we can find money now?  It is not a risky bet to say that after this month of August -and what still may come-, bankers will put on hold any new operation for a while.

Solidity & Credentials

Nevertheless, we need to go to see our bankers now, being sure not to ask them for money but on the contrary to acknowledge their current predicament, keep them updated of the status of our project, and focus in its solidity and in the duration of the production cycle.

Indeed, projects starting now could be ready to be completed by 2013 -a moment in which the market should be in full recovery.

What’s the objective? The purpose is to be sure that your banker will have your project in mind when his P&L shows him that they may have done too good a job in the management of risk, but that there is no revenue. At that moment, your project must immediately hit his mind for it is solid, profitable, has all the credentials and is ready to go.

And a top brand project, per definition, has the solidity and the credentials.

So, how to attract the money? In the end, if one can bring power, beauty and soul to a branded destination, money will come too.

For more information please contact FIRSTLOGIC Consulting
http://www.first-logic.com